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The Main Reason Why People Fail at Trading

dollar signsA lot of traders fail at this game because they are undercapitalized.. It has nothing to do with the strategy. It has nothing to do with trend following, short term trading, swing trading, scalping, mean reversion, whatever. At the end of the day any kind of trading has drag via commission, so you have to work backwards.

Let’s assume that your trend following strategy makes fifty transactions a year. So that’s fifty buys, fifty sells, that’s a hundred transactions a year. Let’s assume you pay ten dollars per transaction. That’s a thousand dollars in commission for the year. If you’ve got a ten thousand dollar account, you’re going to have to making 10% just to break even –and 10% is too much drag. If your account is smaller, let’s say its five thousand dollars, you’re going to have to be making 20% just to breakeven. I’m not talking about strategy, I’m just talking about the mathematics of the transactional drag. I don’t care how good your strategy is, if you’ve got to make 20% to breakeven, you’re pushing it up hill.

I’ve come across people who are actively trading, who need to make 40% just to breakeven. Work out what your commission drag is. If your commission drag is more than 5%, you’ve got to make a choice. You’ve either got to increase your capital, or you’ve got to decrease the commission rate you’re paying, or a combination of those. Or you have to stop until you have enough capital. There is no point proceeding in this game if you’ve got to make 20% just to breakeven. It’s a ridiculous thing to do. If that drag is more than 5%, you’ve got to act. You’ve got to stop trading, you’ve got to add more capital, you’ve got to get your commission drag down. Trading is hard as it is, you’ve got to make it as easy as possible, and there are things you can do.

It surprises me how many people cannot be bothered to change brokers, even though a change of broker you can cut your commission cost by up to 70%. It’s very easily done but people just can’t be bothered to do it. That says to me that you’re not really interested in making an effort. They’re playing around the fringes. If you want to take it seriously –and trading is hard enough as it is, you’ve got to put everything in your favor. That means getting that commission drag down. It may be that you’ve got to change brokers, and yes that may mean a bit of a hassle and a bit of hard work. At the end of the day it’s going to be worth it because it tends to make the difference between a success and a failure.

If you don’t have enough capital, you’ve got to save some more capital. I don’t suggest borrowing money. If you don’t have enough capital, you shouldn’t be trading. The market’s always going to be there so it’s a matter of being patient and wait until you’re in a better position to actually be able to make it mathematically possible to make money.