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What Causes Day Traders to Be So Inconsistent?

Bias in trading

While anyone can be successful, most people who enter the trading world don’t have the discipline and patience to practice a strategy or set of strategies allowing them to produce a consistent profit. For most, the required amounts of time spent learning and practicing prevent them from gaining enough experience to be consistently profitable with their trades; and even though people are told they won’t be successful overnight, most new traders think that they will be the exception. 

Why is the Day Trading Success Rate So Low?

Day trading averages about a 3.5% to 4.5% success rate. According to many, it is because most people simply don’t give themselves enough time to learn, or they just keep repeating the same mistakes and never improve or learn from them. With a mentor, the success rate will increase, but it’s still ultimately dependent on the individual’s drive to become successful and to put in the work required. Practice doesn’t make perfect, but it most definitely leads to improvement. 

It’s no secret that it’s challenging to turn a profit through day trading, and although every day trader believes they can make money and assume that day trading is easy, most people who attempt day trading end up with a net loss. A large contributing factor to this is the absence of a solid trading strategy.

Simply looking at a chart in hindsight is not an effective way to create a profitable plan. Rather, developing a robust strategy can help prepare you to take action before a profitable opportunity arises and not after. The goal of your strategy should be to uncover patterns and trends that point to trading opportunities that could deliver positive returns. Without doing that research, your results might be largely determined by chance. 

Why Are Traders so Inconsistent?

One of the biggest struggles in trading is maintaining consistency. Most traders struggling with this may find that they are more compelled by the short term success and pain avoidance rather than the long term. The minute you start making decisions in the heat of the moment, you are at risk for having those decisions be motivated by short term success or pain avoidance. For this reason, before approaching any market or trade you need a plan that you follow consistently. Behavioral consistency creates profit consistency. 

How to Maintain Behavioral Consistency?

Sometimes it’s hard to maintain consistency because in the heat of the moment you forget. It is so easy to get sidetracked by emotions or distractions and forget that your intentions were to follow through on your strategic plan. In that case, it can’t hurt to have a visual reminder next to your computer monitor. Another suggestion is to keep to a strict routine. Routines are a great way to prepare you for the trading day and many day traders have strict routines to help condition them to be consistent and get better at any given skill. 

Furthermore, a  very overlooked phenomenon is trading psychology. Many believe consistency is easy if you have the right trading system, but the reality is that it is not that simple. Everyone has their own sort of biases and blind spots that cause blemishes in their trading habits. In terms of trading the most relevant example is loss aversion. Loss aversion places a greater value on a dollar lost than a dollar gained. Sometimes traders oppose the prospect of losing so much that they often override their own strategy to avoid the loss. To make the most of trading, have a profitable experience, and maintain consistency don’t neglect or overlook the power of trading psychology. 

Moreover, not being fully committed to your trading plan can also contribute to inconsistency. Your plan is there to protect you from your worst enemy – yourself, and trust me you need it. A plan provides structure and direction to help you navigate through uncertain times. Through plan structure and direction consistent profitability can be achieved. Trading without a plan is reckless and will only lead to your demise.

For some consistency is hard to maintain because of the discomfort it can bring. When the market does something you did not expect, or something you expected but refused to acknowledge you may find yourself in an uncomfortable position. Naturally as humans, we try and steer clear from discomfort and run in the opposite direction, but in terms of trading it is a terrible strategy. It doesn’t help to panic or run, the only thing to do is face it. Face the trade opportunities, face the trade losses and failures, face your fears and your discomfort. Facing things will only make you a better and stronger trader. 

Lastly,  it’s easy to give into temptation and rationalize even when your plan tells you not to do something. Allowing temptation to rule your response should be avoided at all costs. Always approach trading with a plan and never negotiate it. 

When Should I Abandon My Trading Strategy?

Not abandoning a strategy is just as important as creating one in the first place. Once you have a solid trading plan for approaching the markets that is tried and true and has led to success, do not abandon it even if the method has led to consecutive downfalls. When traders feel their current strategy is no longer valid, they may begin to trade using a new untested method. The problem in this scenario is evident; a trader should not abandon a method that has proven to be profitable for an untested method. 

However, there are cases in which changing a strategy is necessary. To gauge whether that is the case, ask yourself if the original success was random? Randomness can create winning streaks with a flawed method, but can also create a string of losses with a great method. Therefore, figuring out if a trading plan is not actually going to work anymore because the success was random or determining if this could simply be a run of losses based on current market conditions that will soon pass is key. 

It’s important to note that all traders experience losses, and there is no absolute number of consecutive losing trades that will alert a trader as to whether their plan is working or not. Even the best traders and trading methods experience consecutive losses, and this is not a reason to abandon a strategy.

Conclusion

To be a consistently profitable day trader, you need a certain drive and hunger. You have to really want to do it so you can stick it out through the long initial learning curve as well as the tough losses that are inevitable. Consistency can be achieved through the presence of a solid trading strategy and not wavering from it. Create a routine, stay committed, and face all the discomfort. 

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