5 Reasons Why Traders Fail (1)

5 Reasons Why Traders Fail – Revelations After Building A Community of 30,000+ Traders – Bid And Ask With Rayner Teo

Alvin Chow
Alvin Chow

Rayner Teo is the founder of tradingwithrayner.com. He started off his career as a proprietary trader and eventually found short-term day trading wasn’t his cup of tea. He didn’t expect to be staring at the screen for the rest of his life and have since switched to longer trading time frames. He started sharing his trading knowledge generously since 2012 and attracted over 500,000 followers on his Youtube channel and 30,000 traders in his Facebook community. His followers come from all corners of the world with India, U.S. and South Africa forming the majority. This is a feat that made Singapore proud. Rayner has interacted with countless traders over the years and he has observed many common mistakes too. He shared five of them in this interview.

#1 – Not having an edge in the markets

An edge is a statistical advantage in a trading strategy that would help a trader make money in the long run. Casinos know this very well. For example, the house’s edge in Blackjack is only a mere 0.28% but this small advantage can reap a fortune over a large number of bets. Hence, every trader must be able to figure if this edge exist before risking money on it.

Rayner said that a trader should always make use of existing strategies and tweak them to suit yourself. There’s no point reinventing the wheel by developing a trading strategy from scratch. He recommended to explore strategies from books such as Following The Trend by Andreas Clenow and Unholy Grails by Nick Radge. These authors share why certain trading strategies work and knowing the reasons behind them can increase your confidence in employing these strategies.

The next step is to validate the strategies through backtesting. This is where you would need to hire a programmer if you are not one yourself. Rayner emphasised the importance of having good quality data and discouraged the use of free data due to poor accuracy. Backtesting softwares are also limited in the types of strategies you can test. Investing in good quality data and a programmer to do proper backtesting can yield endless dividends in the long run.

#2 – Lack commitment

When I hear ‘let me try forex‘, I know it is game over.

Commitment is something you have to give to even stand a chance of success in any field. That includes trading – you are competing against the smartest and the richest in the markets so you have to be serious about it.

Uncommitted traders usually approach trading as a hobby – something they do for fun. Or they may wish to make money on the side without having to work for it. Unlike getting a second job, trading seems easier which you can use money to make money. Lastly, they may have the attitude that it is all fine if trading doesn’t work out. Just try and if it works, great. If it doesn’t, no love lost. All these are signs of a lack of commitment and trading success would continue to elude these traders who have such mentality.

On the other hand, Rayner observed committed traders tend to be proactive and are eager to ask questions in a bid to figure out the nuances of trading. They show their determination to make trading work for them. They learn relentlessly.

#3 – Lack of risk management

You can still lose money if you are using a trading strategy with an edge because of poor risk management. We should learn from the casinos once more – why do the tables have betting limits? Wouldn’t they make more money by not having a limit since they have an edge over the gamblers? This is because casinos know that they can lose in the short run and they don’t want to lose big amounts when they do. Table limits are part of the risk management.

Similarly, traders should not over bet – you should not put on a $50,000 position on one trade with a $100,000 capital. Significant capital can be wiped out if you get two trades wrong in a row and it is very possible in the markets.

Even Warren Buffett who espouse a concentrated portfolio owns many stocks and not just bet on one or two of them. A lot of things can go wrong in the economy or the business environment and no one can get it right all the time. Thus, don’t go all in on one stock.

Rayner observed traders who are undercapitalised tend to bet everything in one position. These traders may have a few hundred dollars of capital and it is hard to diversify into several trades at once. Coupled with high leverage, it is very easy for the capital to be wiped out with just a small move against the position. It is important to still bet a fraction of it and practise risk management right from the start. It pays to form a good habit.

Risk management is not just position sizing but it involves many other methods such as price-based or time-based stop losses and rebalancing of portfolios. Traders should therefore use the relevant risk management methods to minimise risk of ruin.

#4 – Wrong expectations

It is a common misconception and a wrong expectation to approach the markets with the goal of deriving an extra or a passive income. Rayner believes this is wishful thinking. Trading is tough and often tougher to make an extra income than getting a second job. The market is always changing and therefore it is difficult to get a consistent income from trading.

It is not impossible though. One way is to understand how High Frequency Trading (HFTs) work. HFT may place at least thousands of trades in a single day and the law of large number will ensure they reap the statistical advantage of their trading strategies. Just like tossing a coin. You may get 1 head and 3 tails if you toss the coin four times. But if you toss it 1,000 times, you are very likely to end up with 500 heads and 500 tails. Hence, you need to be able to put on massive number of trades in order to derive a consistent income. But more often than not, it is not practical for an individual to do so. Placing a few trades a day would mean the results are random in the short run and an income is hard to materialise.

Another common expectation is to achieve a consistent returns per year. Some traders mistook an average return of 20% per year means the strategy can achieve 20% year in, year out. The average doesn’t tell you the variance in actual yearly return – there will be years whereby you receive losses, and some years with gains of more than 20%.

#5 – Strategy Hopping

It is common for traders to believe there’s a holy grail trading strategy out there. They try to find it and when a strategy doesn’t seem to work, they hop to another, hoping to find that holy grail. The reality is that no one strategy works all the time because market conditions always change. The proper way to hedge against this is to trade multiple strategies that do not correlate with one another.

However, Rayner thinks it is hard for beginners to start multiple strategies. Everyone has to start somewhere and it isn’t wrong to begin with one strategy and master it before adding more strategies thereafter.

Bonus – Strategy mismatch

Rayner was kind enough to share one more lesson. He found that some traders may suffer from strategy mismatch. For example, someone with a full time job would find a day trading strategy very difficult to execute. On the other hand, someone who wants to join a proprietary trading firm should start with day trading. Hence, you must understand your context to know what kind of trading strategy to employ.

What’s next?

You can access free courses, guides and videos by Rayner on tradingwithrayner.com and Rayner Teo Youtube channel.

There are two books Rayner mentioned during the show, Following The Trend by Andreas Clenow and Unholy Grails by Nick Radge.

Although we talked about the negative side of trading in this episode, trading can be a valuable skill to master and it can deliver dividends for the rest of your life. Spend your time to invest in this lifelong skill. Utilise the free resources to figure out if trading is for you before you proceeding further.

The next episode of Bid and Ask would be an interview with the founder of Syfe, Dhruv Arora. Syfe is a roboadvisor in Singapore and its REIT portfolio has been getting the attention from investors lately. Join us on 13 Jul 2020, 730pm on our Facebook Page. Same time, same channel. See you!

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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