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Why MOst people lose money when trading FINANCIAL MARKETS

January

Monday

January

01

1999

at

10:00 AM

(timezone)


Welcome to another blog post.

In this post, I want to talk about why most people lose money trading Financial Markets, sometimes a lot of money.

Although there are probably very many and varied reasons, for traders losses, 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 are  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 Future Prices and Targets

Most people who follow the markets will know that predicting financial markets is the staple diet of the hundreds of financial analysts who now occupy our TV screens, radios, newspapers and the financial blogosphere. They seem obsessed with it.

The vast majority of these ‘analysts’ are highly educated people, some of whom have dedicated their entire life’s work to analysing financial markets using a particular method, for example Elliot Wave and understanding what makes markets 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 and the trading puzzle in general

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

Predicting markets for 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 stock, fx or commodity specialist predict prices long term,  and fail, then get up and do the same thing again 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 banks, I realized that their analysis might be clever, articulate, well researched and thought out, but it did not solve the problem, the financial analysts working for those banks were still lousy at predicting prices.

In most of the papers churned out by analysts, nearly all the predictions made turn to dust and bring both them and their clients very little by the way of financial reward, other than for the fees for the banks who sell their research and tip sheets to clients.

I am not a psychoanalyst 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. No neither have I

It seems that most people simply want to be seen to be 'right’ – it’s a similar situation in most domestic quarrels, between spouses, generally most people want to have the last word – ignore the facts of the issue itself – just having 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. Very few people look back at what was previously set and get an idea of the expertise of the analyst who made the 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 the question: Why does it happen that people insist day after day, week after week, month after month to predict, fail, stand up and predict again, is a difficult question to answer. Some people are paid to do so of course.  It seems that the ‘pull’ of wanting to be right is so great that we are all psychologically programmed to follow the same rhythm and behaviour.

When I first started trading it was always said that trading is young person’s game, forty something years later I have to say that I am not in agreement with this statement. With some age and 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, Commodity and Stock Markets Give Us Great Trades

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’  get it, it was only when I became so ill with banging my head every day on a wall marked 'market'  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 to the markets, everyone know when a great trend is under way, this may be measured by a myriad of different ways, I personally like break outs of daily highs, 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

Tip: Losing money trading - if you prefer to invest your money so that you will  always receive a positive return, then it is probably better to put your money in a deposit account at your local savings bank.


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