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Did you know most aspiring day traders quit within the first two years? And only a small group actually make it to their 3rd year of trading? Of course, this research is not exactly comforting, but the reasons for the lack of success of many traders may surprise you.

The real reasons that frequently decimate trading accounts have nothing to do with the actual trading system. In reality, the more influential factors tend to be related to:

  • Poor trade management.
  • Poor money management.
  • Poor risk management.
  • Poor capitalisation.

In this article, we shall learn how to gain consistency and longevity in the trading business by inverting typical “bad habits” retail traders tend to demonstrate.

Adopt Proper Trade Management

Most retail traders typically desire high win rates, but they fail to “ride winning trades and cut losing trades”. There is tangible evidence that retail traders, with the kind of platforms and access to quality information available nowadays, have developed a strong sense for entries, and they are capable of achieving win rates consistently above 50%. However, they do not let their winning positions run, and instead take quick profits.

The reasons can be many, but at the core is the incapacity to remain emotionally detached from the markets. Retail traders “hate to be wrong” and will take small profits because of this. However, if losses are larger than winners, trading accounts will suffer “death from 1000 papercuts”.

The logical solution is to have a solid structure in place with which to manage your trades in a logical and consistent manner. Simple tools that can help with managing trades successfully are:

  • Peak/trough analysis.
  • Price behaviour.

Connected to proper risk management is the concept of money management. Most retail traders typically use too much leverage. It is true, of course, that the high amount of leverage available to Forex traders makes it possible to trade small, since margin requirements are minimal. Forex may be one of the best markets for learning how to trade, precisely because of the low costs. However, leverage is a double-edged sword and most retail traders fail to properly grasp this concept, inevitably adopting position sizes that are far too large for their account balance.

Why do traders fall into the trap of overleveraging their account? There can be many reasons, but they are usually connected to a gambling mindset, to over-trading (thus having too many single positions in place at one time), or just for the rush of adrenaline that “betting” gives some people.

The bottom line is that the more a trader leverages his account, the less mental leverage he will have. The more money is on the table, the more attached to the bet (and hence, the more emotional) the trader will be. This is all counterproductive, of course.

Keep your trading size under control, and use leverage effectively. Don’t push your risk limits.

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