Why Most People Fail At Trading Financial Markets

Why Most People Fail At Trading Financial Markets

In this post I want to talk about,why most people fail at trading Financial Markets

Although there are probably very many and varied reasons, I want to look at what I see as the most important of them. The standard reasons which you can find in any book about trading like,, under capitalization, over trading, wanting to get even with the market and such like, I will leave for those books and they will not be covered here.

Predicting Prices and Targets

Most people who follow the markets will know that predicting financial markets is the staple diet of the thousands of financial analysts who now occupy our TV screens, radios, newspapers and the financial blogosphere.

The vast majority of these ‘analysts’ are highly educated people, some of whom have dedicated their entire life’s work to analysing financial markets and understanding what makes them move. It gets better. Some of them are world renowned authors, whose contribution to the finance industry has been  recognized via industry awards  – they have unquestionably contributed great things to industry.

These highly intelligent people, seemingly leave their true analytical abilities in the trading room changing rooms as once out on the pitch they appear to rely on guess work, hypothesis, hope and the other multitude of characteristics which us humans love to rely on, in order to justify our existence and explain away all manner of rational ideas.

Predicting markets anything other than a few hours to a few days in the future is nothing more than claptrap.

Given the world in which we live, with the geo political situations that accost us on a daily basis, how anyone, let alone some of the most intelligent people on the planet thing that they could possibly predict markets six months or a year into the future is beyond comprehension.

What is going on and why is this happening ?

Ever since I started becoming interested in the markets – I was about sixteen years old at the time – I have seen one after another specialist predict prices long term, fail and fail again. Like most people, in the beginning, I swallowed all the expert advice out there, I could get my hands on and paid my tuition fees to the university of trading.

When I started working for the big banks themselves, I realized that their analysis might be clever, articulate, well researched and thought out,  but it did not solve the problem that the financial analysts working for those y were still lousy at predicting prices.

In most of the papers produced by analysts, nearly all the predictions which are made turn to dust and bring both them and their clients very little by the way of financial reward, other than for the banks who sell their information to end clients.

I am not a psycho analyst but for me what is happening here is a question of ego and simply wanting to be right about something. Everyone wants to predict the outcome of the next big match coming up Saturday – but have you ever heard of anyone saying, I’ll make my prediction once both teams have played thirty minutes and I have had a chance to judge who is on form on the day itself and who has been affected by injuries, news, pressure, team morale and all the other points that affect sports teams.

It seems that most people simply want to be seen to ‘be right’ – it’s a similar situation in most domestic quarrels, between a spouses, generally most people want to have the last word – ignore the facts of the issue itself – just get the last word is how most people think. And so it is with financial markets, show your prowess and expertise by coming to the table with complex prediction and arguments to support those predictions.

What should be obvious to most people is that the moment you make a prediction based on anything, there are a myriad of parameters which can and will almost certainly move – if they are not already moving  – against you. The complexity of the analysis that has to be achieved and the control of the parameters which are involved is simply too complex to predict.

Predicting is for wellies.

To answer why does it happen that people insist day after day, week after week, month after month to predict, fail, stand up and predict again, I am unable to answer. It seems that the ‘pull’ of wanting to be right is so great that we are all psychologically programmed to follow the same rhythm.

When I first started trading it was always said that it was a young person’s game, thirty something years later I have to say that I am not in agreement with this statement. With some age or possibly maturity it is possible to see through the ‘predicting’ problem, stand back and start to look at the market in a different way that most people.

Ask yourself this question what is more important, predicting that the Euro will reach parity with the USD or taking a trade which turns out to be profitable ?

If you don’t see the nuance in the question, then you haven’t got there yet .

My point is this – we are all looking for profitable trades, we don’t actually need to be ‘right’ about anything or to prove our prowess, we just want the pips in the bag. None of us need to brag about our capabilities of picking tops and bottoms based on arbitrary  situations, we just need to be able to take the pips that are offered to us when the market tips its hat for us to get in.

The Forex Market Gives Us Great Trades

Again years ago, a new and fresh body of opinion came to the market with phrases like ‘Let the market dictate the direction’.

At the time I too didn’t’ t get it, it was only when I became so ill with banging my head on a wall marked Forex market every day that I suddenly realized the futility of predicting the outcome of anything and the simplicity of putting your money down on the team who is playing the best at the time when you are keeping an  eye on the game.

I use the analogy of the football match , because it’s the simplest for many people to understand.

If we return the markets, everyone know when a great trend is under way, so we have two choices , join in or wait for signs that it is all over.

What’s great about the above two opinions ? Answer: Nobody is predicting anything