I have written many posts in the past about what makes new traders fail in the market and which characteristics I believe could help them survive. On today’s post I am going to write about one of the most fundamental things that make new traders fail and why it is such a universal problem in the world of new forex traders. I am also going to give a few tips on how this problem can be overcome and what worked for me when I started trading and was confronted with the big issue of the small profit.
Let’s face the facts: most new traders are uncapitalized and don’t have the necessary amount of money to live from trading. New traders usually have risk capital amounts between 0.1-10K which are very far from enough to live from trading on most developed countries (and even many undeveloped ones). New traders deal with this limitation by targetting very high profit targets which they can use to obtain capital much faster (even 100% a month is not unheard) with the hope of later reducing risk to achieve profits.
However – as we have already discussed extensively in the past – there is an inherent market cap to the average compounded yearly profit to maximum draw down ratio which is at best 4:1 (as per what long term audited performance has shown, see posts on the Barclay traders index) meaning that traders who want to make such large profits will inevitably wipe their accounts in the medium/long term, long before they reach the necessary amount to really consider living from trading.
However the reality is that most traders will need to attempt this and lose accounts before they realize that such profit targets are not achievable, once they do the inevitable crash against truly achievable profit targets becomes a reality and traders are disappointed to know that even with a ton of effort and understanding the maximum amounts of profits they can make in a consistent long term fashion are rather small. When you tell a new trader that making an average 20-40% a year for 5 years is extremely good he/she will tell you that if that’s the case then trading for them makes no sense (as they cannot get rich quick).
There is an inherent disappointment in the fact that capital accumulation simply cannot be done very rapidly in a way that makes long term sense. Certainly fast accumulation is possible through random chance but – as other past posts have shown – there is a better chance of making this money by playing the lottery than by attempting to take unsound risks in the market. New traders therefore have their hopes “crushed” as the scenario that is real is not what they considered to be the actual truth about how market performance and capital accumulation works.
Without a doubt one of the probably hundreds of reasons why aspiring traders fail is because they become disappointed when they realize that after a ton of effort the achived yearly profits are not spectacular. When they see that with their 1K USD investment they will be getting just 200 USD per year if they do things with a long term perspective with conservative risk targets they simply think that this is just not worth the effort. I have met at least a dozen traders who have failed due to this reason, people who after 5-10 years of trading Martingales, grids, scalpers, etc and fooling themselves through unsound simulations and curve-fitted results come to realize that their intended get-rich-quick scheme isn’t possible and that just getting that “small” percentage each year doesn’t “cut it”.
However if you want to become a Forex trader to live from trading and you do not want to manage other people’s capital (getting the appropiate regulatory permissions to do so) it becomes clear that this journey will take you at least 6-15 years, even with capital additions but even if you start small after all your hard work and time you will achieve a base capital between 500K- 1 million which will serve not only as a base to live a very comfortable living from trading but also as a savings deposit in case you for some reason eventually need a substantial amount of cash. You should NEVER underestimate the power of compounding as even on modest yearly returns you will be able to achieve financial freedom with time even if realistic returns are much lower than what you first expected. The key here is to have a long term perspective and do NOT feel disappointed because in the beginning your returns will be very small. Remember that in the beginning you’re attempting to learn how to profit and after you learn how to do this consistenly time and compounding will bring you giant amounts of capital.
If you like my views and you would like to learn more about my work in automated trading and how I design and evaluate algorithmic trading systems with a focus on sound money management and trading tactics please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)