Why do traders lose their money?

money

74% of traders are not involved in the analysis of their trades. Therefore, they do not know how strong their benefits are.

66% of traders are constantly changing their strategies as soon as they received losses several times.

73% of the traders do not have any somehow formalized strategy. This 5-year study led us to a very interesting conclusion.

 

Read the full article and at the end I will give you a great bonus!

The decision on the opening and closing of any position is made on the basis of intuition. But the results of the work of Nobel laureates Kahneman and Tversky suggest that in almost all cases, the accuracy of intuitive experts’ predictions in any directions (whether, it’s stock quotes or the development of science) is not more than 50% on average.

 

Let’s recall the well-known expressions of experts:

 

  1. Will anyone be interested to hear the actor talk? “- G. Warner, founder of the film company WarnerBros, 1927, in respect of the first “talking” movie.
  2. ” I believe that 5 computers will be enough for the world market…” – T. Watson, IBM head, 1943.
  3. “The idea of traveling into space is nonsense!” – words of Sir Harold Spencer Johnson, Astronomer Royal, United Kingdom, 1957. Two weeks later, Russian scientists have sent to space the first space satellite.
  4. “640 kilobytes of RAM is more than enough for any”, – Bill Gates, 1981.
  5. “Horses will always be our transport while car is just a fashionable toy ” – director of the Michigan Bank to Henry Ford in 1903.

They did not just make a mistake. They were wrong drastically like the co-founder, who sold his share of Apple stocks for just $ 800. And why do we think that others may be wrong, while we can’t?!  We can also make mistakes and take wrong decisions.

Now ask yourself the second question. If the probability of price movement up or down is 50% – then why 80-90% of traders lose money in the market?

One of the most correct answers lies in the same psychologists’ observation of the game, in which the probability of winning was 50%, but there was an opportunity of different betting. Participants were given a small amount of money (about 10USD) and offered to bet from 1 to $ 10. Voluntarily. There were many volunteers among the students who have tried to play this game. From the point of view of mathematics this is zero mathematical expectation, so only a very small percentage could lose completely. But from the point of view of psychology, almost everyone lost. You probably already know why?

Of course, they were excessively raising their rates in order of losses, until a series of random losses led to the complete defeat.

A simple example. You have a strategy that gives you 2 winning trades out of 3. This is a very good strategy. But every time you run the risk to lose half of your capital. The probability that 2 times in a row you will have losing trades is about 11% (and, accordingly, you should consider that you will lose every 10th game, despite the fact that you have an excellent strategy).

But why “seems-to-be” not-stupid people are starting to run such unnecessary risks?! Again, studies of Kahneman and Tversky give us the answer: people do not like to lose money. The pain of loss is much stronger than the joy of the acquisition. So if people are offered a game in which with 52% of success they win 100$ or lose 100$ with a probability of 48% – in most cases, they refuse. Because, psychologically , loss of $ 100 is much harder than getting the same amount. And what do they want to do immediately after a loss? That’s right – win, to fight off the loss and return it. And for this they raise the rates. People do not think and do not count, whether their chances of winning increased, whether the conditions are improved, whether there are additional benefits. They think only of one thing: how to return a loss. And that emotional desire absolutely dominates the logic.

When you as a trader got loss, you start to look for an opportunity to win back. Our brain is not perfect. You begin to see what does not exist. Opening positions, where you have never done this before, when you got no desire to win back.

What does a trader who trades strictly by his own system?! He is waiting for the input signal. He will not dream up it, justify it, and look where it is not. No. He’s just waiting for a signal.

Additional bonus. When you trade systemically, then all mistakes are not your personal mistakes. This is a system error. You need to work with it. But when you are trading intuitive – all mistakes are your mistakes personally. For many people to admit their mistakes is harder than to lose money in the market. Think about this phrase.

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