Financial failure and unsuccessful trader stories related with stock trading are quite common. Trading stocks with consistent profitability is a most difficult occupation, with an estimated failure rate of at least 90% where short-term investing is involved, such as day trading.
There are many reasons that this failure rate is so high, such as:
- Most new traders start out with too little capital, and the expectation of being able to pay their bills with their trading profits is not met.
- Many traders, particularly new traders, start without a coherent game plan or strategy to trade.
- The unpredictability of the markets, especially in the short-term.
- The large number of corporate and financial scams and fraud among listed companies.
- Poorly controlled advertisements and biased aggressive advertising campaigns related with trading, brokerage and stock picking strategies.
- Largely unregulated publications that are inaccurate at times as well as poorly conducted courses that are not credible in many instances attended by traders hoping to get rich by trading on the markets.
- Allowing widespread promotion of inaccurate and unproven trading methods for stocks, bonds, commodities, or Forex.
It is obvious that speculation in stocks is a risky and complex occupation because the directions of the markets are generally unpredictable and at times, lack transparency. This does not invalidate the well-documented true stories of large successes and consistent profitability of many individual stock investors and stock investing organizations within the history of the stock market.
But in any situation the opposite exists, and this is true in regard to traders. Opposite the successful traders who trade with the necessary moderation, there are those who trade excessively without realizing that they are signing up for sure losses….their money disappearing into the dark, blue yonder.
Over trading is the excessive buying and selling of securities by an investor in order to increase the probability of successful trades. It is an affliction difficult to self-diagnose and a very enjoyable way to go into Chapter 11.
Many traders recognize it easily in others, but not in themselves. Over-trading is a psychological problem that consumes profits and destroys trading capital.
For many traders, the two main roots of over-trading lie in a need to chase the market to recover losses, and in a desire to look busy. The first leads down a road to gambling. The second, the impulse to look busy, usually costs the trader a great deal.
Two types of over-traders:
Type I: Technical over-traders
Novices in trading justify their actions by the technicalities of this field. Many of them find some technicalities working to their advantage. They then make pre-determined positions and look for some indicators to confirm their choices.
Type II: Impulsive over-traders
Traders who make use of non-statistical or non-mathematical data often rely on other people's opinions, on the news, on their personal observations and hunches and advice by so-called experts or gurus. The problem with these is that they cannot compensate for quantifiable data and that the discretional over-trader finds it hard to stay put because of them. They cannot stand inactivity thus they have to satisfy their compulsion to trade. The lack of assessment of sufficient indicators and enough technical knowledge is often the downfall of a trader.
Over-trader example - an extreme case
In 2013, two former employees of JP Morgan Chase, Javier Martin-Artajo, a manager, and Julien Grout, a trader were suspected of concealing a near £4bn trading loss from the heart of its UK operation in Canary Wharf. Federal investigators said the men were suspected of trying to cover up a $6B trading loss in 2012.
The losses at the heart of the JPMorgan case stemmed from outsize wagers made by the traders at the bank's chief investment office in London. The traders used derivatives - complex financial contracts the value of which is typically tied to an asset like corporate bonds - to bet on the health of other large companies. The trades turned sour, racking up steep losses for the bank.
Over-trading is avoided when traders accept that significant rewards do flow from work that does not involve long hours, stress or sweat. They must appropriately value their intellectual and analytical contribution to the process of trading and accept their rewards as commensurate with this. They must understand no additional work is required to justify their income.
They act late and then lose because they tend to buy when prices are already high and sell when prices are already low.
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