90% of traders fail within 90 days: How to avoid becoming one of them

In trading, there is a popular maxim claiming that 90% of traders lose 90% of their money in the first 90 days, otherwise known as the 90/90/90 rule. Many people enter the wilderness of trading imagining a convenient way to make money, but there are a multitude of risks that catch hopeful traders off guard very early on.

While 90/90/90 is more of a helpful reminder than a strict rule, it serves to emphasise that the aim of success in trading is just to be making a profit — that does not mean you have to win every single trade, because you most certainly won’t. The most successful traders know that losses are just a piece of the pie that you need to swallow sometimes. 

This guide will help you avoid those sustained losses that see so many beginners crash out.

1. Respect the risks

While the stock market seems complicated and intimidating, this should not discourage newcomers from trading. Yes, the learning curve is steep, but the principles are relatively straightforward. In the same way that it would be unwise to venture into an unknown place without a map, you need a good foundation knowledge of how trading the markets works, rather than going with your gut.

If you are planning to trade aside from your day job, why not use technology to keep you alert, such as market update apps, allowing you to monitor market activity? More to the point, study the market itself. Even if you’re not a statistical whizz, you can read up on economics and books on trading, and follow financial news regularly.

As a newbie trader, hopefully, you’ll gain confidence once you’ve spent time educating yourself. However, even if you feel like you have the understanding to trade sensibly, you must still manage the risk.

Markets are unpredictable, so taking control of the risk is good practice and vital for limiting losses. Investopedia has compiled a list of risk management techniques that you can follow, such as using stop-loss orders. These limit the maximum potential losses on trades by setting a point at which you buy or sell a stock, depending on price changes. For instance, a stop-loss point at 10% below what you purchased a stock for will cap your losses to 10%. Trade Nation’s trading simulator demonstrates what this looks like in action, and allows you to experiment with stock trading and risk management tools virtually, and for free.

2. Create a trading strategy

Once you are confident you understand the nature of the beast, don’t just jump in without thinking about what your strategy is and putting it down on paper. 

What your strategy looks like is down to you. While you might feel comfortable following particular trends, some traders choose to go against the grain, investing in the underdog markets or trading against the trend. However you decide to approach trading, take the time and self-control to properly understand the strategy and its reasoning, and see if it works for you. Then refine it until it becomes second nature, before thinking about employing other strategies for trading.

Although you should stick to your strategy whenever you enter a trade, you’ll likely have to make changes at some point. Perhaps it isn’t working out as planned and needs to be tweaked, or maybe your goals, knowledge, and abilities have changed with time and you need to adapt accordingly. Successful traders know that, in retrospect, it pays to be self-critical, and reviewing your strategy once a month (or even once a week depending on how often you trade) in these early stages is especially important.

Regular journal entries can pinpoint where you have slipped up or missed opportunities. StockTrader has ranked some of the best trading journals you can use for this purpose.

3. Remember, greed is not so good

Fans of the movie Wall Street will no doubt remember the villainous corporate raider  Gordon Gekko, and his notorious ‘greed is good’ mantra. Sure, he may have been indicted as a criminal, but he was damn good at his job, right? 

Not so fast…

One of the biggest mistakes a trader can make is letting primal emotions like greed or fear overtake their decisions. This results in mistakes that potentially lead to big losses. One of the best examples of this in action is the influence that FOMO (fear of missing out) has over all traders, not just beginners.

The stock market can look like one big oyster: you glance at the charts and see a vast, exciting circus of opportunities, and instantly fear wasting any chance to make more money. Yet following this impulse, you might have guessed, almost always leads to huge losses. Greedy traders make rash decisions, spurning their risk management strategies and overtrading because they want fast money. In fact, this is a surefire way to lose money, and fast.

Alternatively, a trading system will put mechanisms in place which can help you resist these impulses towards greed and fear — for example, using stop-loss orders as mentioned above. Where short-term thinking will let emotions dictate your trade, controlling this by setting clear risk levels will help you become a consistent trader who makes more winning trades than losing ones. This — not big wins — is ultimately what makes a successful trader.

4. Invest in trading, not just trades

As we’ve tried to make clear, successful traders rarely treat trading as a casual hobby. It is not enough to nerd out on trader knowledge and get some experience. Ultimately, you need to treat it as a business, which in turn demands a professional approach.

Just as you should have a strategy in place that you regularly review, you must develop a wider plan and commit to trading. 

Your strategy is a methodology, designed to help you maintain profits and avoid losses when you put your money on the line. This can involve, for instance, having a good idea of your entry and exit points  well before you actually make a trade.  

Your plan, on the other hand, is about what you are doing when trading has stopped.

A trading plan consolidates strong research into particular markets and helps you decide which markets to trade. Investing time and energy into a plan will help you define your trading objectives, and help you decide which strategies to use, and when, in order to meet them.

Crucially, your plan needs to fit you: assess your skills and weaknesses before you trade — your plan should evolve with your learning. If strategies can mitigate potential losses, your plan is the framework you are using to develop the intelligence-based confidence you have in order to be there in that trade, knowing the odds are in your favour.

Despite his flaws, Gordon Gekko was right about one thing: the most valuable commodity you own is information.