Despite the unfavorable odds, many educated and intelligent people are still lured to trading – where staggering statistics show that less than 10% of traders turn a long-term profit. Bitcoin is no exception; its market forces and emotional turmoil can be mercilessly unforgiving toward investors’ pocketbooks. Furthermore, research even suggests this success percentage could actually be lower!
With such gambling stakes at hand, it’s worth looking back on our own individual decision-making process before taking that plunge into financial markets with both eyes open…
Six Shockingly Statistics Uncovering How Difficult Trading Can Be
Sure, the appeal of working for oneself on a comfy couch with millions in tow is enticing. Don’t fall into this false sense of security; day trading requires immense skill and emotional control that few possess – it’s far more likely to rob you than grant you any wealth. Let’s take a look at some facts and figures from an online educational resource:
- Within the first two years, 8 out of 10-day traders throw in the towel and abandon their aspirations.
- Four out of every ten-day traders only trade for one month at a time.
- In the span of three years, only 13% persist in day trading; this number reduces to 7% after five.
- On average, individual investors lag behind the performance of market indices by 1.5% annually;
- Year after year, studies have shown that active traders are underperforming by 6.5%, indicating the need for investors to take a more passive approach with their investments.
- Despite their protracted history of poor performance, traders who have gone ten years with negative returns continue to trade.
Unfortunately, many potential traders are not adequately prepared for the difficulty of trading with real money and often learn harsh lessons. They underestimate the mental obstacles present in trading and neglect to use an effective system that eliminates emotion from their decisions.
Additionally, they tend to take trades outside of their predetermined rules. These are all unmistakable causes of failure when it comes to trading. To make money in day trading, you have to average a return greater than the average annual rate of return for the markets. The average day trading return is usually between 5-7% and is compounded annually. Therefore, average day traders must average a return greater than this to be profitable.
“Random Reinforcement” What is that?
One major yet overlooked reason, why traders fail, is the principle of “random reinforcement.” This concept can explain why they continue trading, even after failing several times. The market has a tendency to reward bad habits while simultaneously punishing good ones- especially when there’s not much evidence to draw conclusions from in the first place. To illustrate this point better, let’s take an example out of thin air for demonstration purposes…
Bob wants to abandon his job and become a cryptocurrency trader. With some capital set aside, Bob follows the markets closely, listening to the “big names” on Twitter for tips. Upon hearing about an altcoin with rising prices quickly from one of these influential figures Bob takes action – he buys in and soon after is able to sell off his purchase at a profit! Encouraged by this victory, Bob continues trading before lunchtime; stringing together several successful trades that leave him feeling as if he has found hidden talent within himself as a crypto-trader.
While Bob may have learned his lesson and developed a comprehensive trading plan with the necessary risk management, portfolio allocations, and trade rules in place, he still runs the risk of falling prey to random reinforcement. If this were to happen, it could alter Bob’s perspective when it comes to trading; instead of sticking with his well-thought-out plans, he might take an impulsive approach that is high-risk and rooted in retaliation rather than strategy.
Just stick to your plan day trading plan
It’s essential to understand the concept of random reinforcement and how it works in order to succeed as a day trader. This means having the discipline to stick to your plan, no matter how tempting it is to take shortcuts. It also means accepting losses and understanding that they are a part of the trade. By doing this, traders can avoid common pitfalls and become successful in their day trading journey.
The key takeaway from all this is that average day traders must average a return greater than the average annual rate of return for the markets (5-7%) to be profitable. This can only be achieved if they have an effective system in place that eliminates emotion from their decisions and sticks to a well-structured trading plan.
John Smith is a cryptocurrency expert and blockchain enthusiast with over 10 years of experience in the industry. He has a deep understanding of the technical and economic aspects of cryptocurrency and has a track record of accurately predicting market trends and price movements.
