The #1 Reason Why People Fail at Trading
Published May 18th, 2021
The #1 reason why people fail at trading? They are undercapitalized.
It has nothing to do with a trader’s strategy. It has nothing to do with trend following, short term trading, swing trading, scalping, mean reversion, whatever.
All 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. Now let’s assume you pay ten dollars per transaction. That’s a thousand dollars in commission for the year.
If you have 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.
This is not talking about strategy. It’s about the mathematics; the 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.
Calculate your commission drag.
If your commission drag is more than 5%, you’ve got to make a choice. You’ve either got to increase your capital, or decrease the commission rate you’re paying, or a combination both.
Or stop trading 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 an impossible, unrealistic goal.
If commission drag is more than 5%, you’ve got to act. Stop trading until you can get your commission drag down. Trading is hard enough 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 can cut your commission cost by up to 70%.
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 but it’s going to be worth it. The effort may be the difference between success and failure.
If you don’t have enough capital; save 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 make it mathematically possible to make money.
When you’re ready…