Someone asked me the other day, "Why do traders fail?"

Funny they should ask, because I'm having a tough time coming across a trader who's doing anything less than spectacularly, much less failing. Honestly, I always thought trading was kind of hard, but judging from the email I get and the people I talk to, everyone is doing splendidly.

Frankly, in my zero-sum way of thinking, it's kind of depressing. All my hard work, and for what? I can barely keep up with my buddy Ben, who doesn't know

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. He buys stocks because he "hears they're good" and he has been kicking my butt for months.

Ah, but we all might meet our maker someday, that day when our luck runs out, our money runs dry, and all we have to remember are those times when we could brag that "I was the best darn trader around!" Scared to meet your maker? I am too. Always. Therefore, let me loop around and present my "Top 10 Reasons Why Traders Fail." Maybe if we know what to look for, we can meet again for our 20th reunion.


Being undercapitalized

. I marvel at how many traders I hear of who have turned relatively small amounts of equity -- let's say $10,000 -- into amounts 10 times that size.

However, I'd venture to say the ability to do that is solely market-related, and certainly not the norm. No, you generally need a larger stake in order to survive for the long term. How large? Well, that depends on your methodology, but it certainly has to be large enough to withstand numerous losses from the outset, along with the gradual erosion caused by commissions and slippage due to the inevitable small lot sizes.

Really, though, many folks could stand starting small if they also set their sights low. But they don't. Most want to start with a $20,000 stake and turn it into $200,000 in a year. So they trade in larger lot sizes than they should and a few bad weeks later they're back to ground zero. The fact is, if you want to make big money at trading, you generally have to start with big money. (Yes, yes, this current market notwithstanding!)


Unaware of drawdowns

. I give people new to trading a lot of credit. Most are not idiots and, intellectually at least, they know they can lose money. What they don't know, however, is how they'll handle losing that money. Being up -- and I mean way up -- on the year is nice. To go from that to taking, say, a 40% haircut does strange things to a person. Some do wild things like doubling down. Others freeze and turn that 40% into an 80% loss. Others just toss in the towel, realizing they had no idea what they were in for.


Confusing brains with a bull market

. By now you should know this is my pet peeve. But what can I say? If you have no plan but are making a killing right now, well, live it up.


Defending your position

. I get a lot of email from folks who have clearly fallen in love with their positions. And I mean positions they've already ridden down 60%. Those folks always want to know if I think "XYZ will rebound." Even worse are those who keep throwing money at that dog, thinking they just have to be right, saying: "By golly, XYZ will come back because I've done my homework!" If only the market worked like that.


Thinking you found the one magic bullet

. You want to know trading's one magic bullet? Trading has no magic bullets! That's right: no magic bullets, no perfect "scans," no optimum exit strategies, no never-fail entries, no 100% guaranteed winners.

No, trading is a game of putting the odds in your favor and using a variety of ever-changing approaches. In fact, if there is one magic bullet, it's adaptation, because nothing seems to work forever.


Not being consistent

. Now, having just read number four above, what do most people do? They go with a different style every single day. And that's wrong, too!

Yes, as I wrote

last week, there's a time for staying the course and there's a time for change. Most methods will work if you give them half a chance. But you have to give them half a chance!

Look, I'm as guilty as most: I always seem to jump ship right at my maximum point of pain, which normally coincides with the precise time my method was just about to produce its biggest hot streak ever. If only I'd ridden out the storm ...


Forcing trades

. What is it about idle hands and a dull market? Well, I'll tell you. You crave the action. And when the market is dull or drifting down, telling you to just sit on your hands, you just can't believe it. No, you must be missing something. So you take that squirrelly trade, thinking it should work out. They never do, though, and you always look back and ask, "Why, oh why, wasn't I more patient?"


Lack of confidence

. In golf, there's nothing worse than the "tweener" shot, that shot where you're between clubs and just can't decide, "Hard 8 or easy 7?" So you cobble something together, something you have no confidence in ... and end up chunking it.

Trading's the same way. I trade better when I am absolutely convinced I'm pursuing the right path. I trade poorly when I'm scared, concerned or feel at odds with the market.

So how do you build that confidence? Years and years of experience and data. And that's another reason it's tough for beginning traders.



. Naturally, this is the flip side of number eight and could easily be thrown in with a number of the other reasons listed. But I wanted to deal with it separately because no matter how good you think you are, you're just not that good. Frankly, I've been humbled by the market enough that I fear it. A lot.

In fact, Nancy has to drag my performance out of me because I hate talking about how I'm doing. Call it "not tempting the trading gods," but I know that every second I spend bragging about my success is a second not spent looking over my shoulder thinking about the bullet with my name on it.


Bad luck



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gets buried. Fortunately, I wasn't in any of them. But I'll tell you this: I could have been. Very easily.

Now, of course, I try to mitigate damage done due to any one position by spreading my risk over my entire portfolio. Believe me, I've had my share of gut checks over the years, but I have always managed to dodge the fatal shot. So is it due to skill that I'm still around? Sure, partly. A nice, steady bull market? Absolutely. Some good luck and an absence of horrid luck along the way? Most certainly! And that's something a good trader never forgets.

So, I listed 10, but I know I'm missing some. And that's where you come in: If you have any others let me know.

And if you don't, read the list above and spend some time thinking about it, because if you trade long enough you'll have a chance to experience just about every one. It's how you handle these things that will make the difference between trading longevity and going belly up.

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at