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At the UK Investor Show I was asked the question: “Why do a large proportion of people who trade lose money?” When taken in context against investing for the long term, short-term or intraday traders are more likely to lose money, but there is a small group of traders who consistently make money from the market, unfortunately the percentage of traders who lose money is high.
The answer is simple, and it’s due to a combination of factors including having little self-control and over or under-trading. If you are losing money from your trading make sure you adhere to these guidelines:
– Know where to set your stop loss and place it routinely with every new trade
– Run your profits and cut your losses
– Use discipline to apply the rules as stated by your strategy
– Have patience to wait for the trades that offer a high probability of success
– Have a clear understanding of what triggers sudden swings
Having a plan that works is essential, any profitable trader who has a proven entry and exit technique has an increased probability of success. The difference between a short-term trader and a long-term investor is that a short-term trader has to work harder than the long-term investor. The short-term trader must place trades with precision; if a trade is opened too early the stop loss is at risk on the flip side if the entry level is too far out from price action then they risk missing the move.
So that’s why many people lose money, when they get it wrong they are stopped out and when they get it right they have often missed the opportunity to profit from their wisdom. The advantage for the long-term investor in having no stop loss means price dips and market blips can be ridden until the uptrend resumes, in addition the long-term trader will never miss a move because he or she is always in the market. Historically if we look at the long-term trend of the stock market -it is up, therefore providing there is no major correction, long-term investing offers a safer bet.
Now you will note that I have not mentioned “trading with the trend” above. For most short-term traders profits are made by following the trend. While I don’t disagree with this statement I believe that the factors listed above are just as important as a trend following strategy. Trading with the trend will improve performance but if you don’t have the discipline to hold onto winners and cut losses early or if the stop loss is too tight it could end up being futile.
The caveat for successful long-term investing would if the stock market goes down or sideways for a prolonged period of time. And if you take a look at the following monthly chart of FTSE 100 it’s no wonder people trade the market instead of investing for the long term.
Thierry Laduguie is FTSE 100 Trading Strategist at www.e-yield.com
