This is Why Beginner Traders Lose a Lot of Their Capital All the Time – Part 1
So why do beginner traders lose a lot or most of their capital regardless if we are in a bull or bear market?
A number of factors contribute to this results, and I will publish a series of posts where I will try to shed some light over them.
Since we launched Tradunity.com, and even before, I have received a lot of messages that can be summarised into one that has the following form:
“I bought X coins and made 500% profit but then I did not take profit, I changed X for Y coins and Z coins and then changed back to X and then again to Y and then it fell and now I am 30% (20%, 10%?”) from where I started. Help me get it back!”
Same story, again and again.
I wish new traders would play this scenario in their head before starting trading with 0 knowledge. Also, I think it would be smarter to not start giving trading advice after they traded for 2 months. It creates a false impression of expertise, which will hurt them badly when the markets start falling. I have traded for 11 years, and in some areas I am a beginner myself. Plus, I read and follow traders with 30+ years of experience I look up to, and I feel like an ant compared to them. That is the reality.
These stories like the one from the message are sad, and every one living it feels they are in the greatest pain. It gave me the to write this series of posts. Why do people keep losing? Especially beginners, as they make up the mass of the hype on the posts in TradingView.
Here is a first list of 5 key elements that novice traders get wrong:
1.Thinking this is easy and you don’t need knowledge or experience
If you are new and think trading is easy, you were either on a very lucky break or you probably did not suffer corrections or bear markets yet and you didn’t see how you can lose your capital a lot faster than you can increase it. Actually, most novices manage to lose even in uptrends because of several factors, most of them could be corrected if only they would take the time to learn the theory and read (and also understand) a few books. But since reading books is not so fun as winning a ton of money very fast, beginners prefer to throw themselves out in the ring with the best professionals who are ready to get their money. There is a shorter way, which is beginners can follow experts, but this might turn back against them too as you will see in the next part.
Key takeaway: If trading would be easy, everyone would be riding Lambos, and to me, it seems that too many people are riding the bus after the past months. Remember this: there are always opportunities to make money, don’t hurry: learn how to do it, start small and when you area ready trade with bigger capital. If you hurry, you will make bad decisions and lose money. Take it slow and easy and even if you make mistakes, they will not ruin you.
2.Following the wrong people or too many at once
Following people who you can learn from is good! You benefit from their hard earned experience, you are advised of not making mistakes and following their proven trading strategies that they worked years to form. That is, if you follow the right people.
The problem is, the right experts are not so loud about things. When they get one big trade they don’t go on top of a mountain and shout from a horn that they did one good trade. Experts are used to having good trades and bad trades too, it’s not a unique achievement for them, it’s just business as usual.
Unfortunately is the people with big mouths that take most of the attention, and they are good at that: they throw all the indicators with cool names at you in one chart so you think they know what they talk about: Volume, MACDs, Fib levels, Elliot Waves, Chart Patterns, Ichimoku, MA, and others – all in one chart if possible. Then they will update it 10 times in 1 day and change directions a few times and this is not good for you as a beginner and for them it shows that they don’t have experience in making charts. A chart should be easy to read and easy to learn from.
This is not even the biggest problem, the biggest problem is probably you follow more than one person and these persons might say different things at the same time. And if you are a beginner you will start wondering who is right, because somebody should be right all the time, no?
I hope I am wrong and until now you must know that many people can give you absolutely different opinions. One guy thinks Bitcoin will go to the Moon, and another crypto legend is sure that the market will drop to 4800 level. Who is right? It’s difficult to say but the sure thing is that thoughts, ideas, opinions from different sides can push you to make mistakes. Nobody knows where the market will be in some time. Nobody knows the future. Nobody has a Crystal Ball. When someone tells you that Bitcoin will drop or rise, and he is absolutely sure – please, don’t believe in these words, better to turn around and leave. We use Fundamental and Technical Analysis just only to predict POSSIBLE price movements. That’s why you can read and hear different opinions about the market but it should not be a call to action. If you open a trade based on your or on the trading ideas of somebody else, you must follow it from beginning to the end and only YOU can decide what to do with this trade, but not opinions from other people.
Key takeaway: It’s good to follow people to learn from them, if they know what they are talking about. It’s a mistake to follow multiple people at the same time and try to open trades based on all their ideas, because many times their ideas will not be the same, and can contradict each other. It will create confusion and fear in your mind, not too mention that you will be stuck in front of the charts all the time, forgetting about your life. And the mistake that will follow is that you will open trades on one strategy and out of fear you will close them on another one which will make you lose most of the times and win few or 0 times.
3.Using too many indicators
I said before – when you are a beginner and you see all these indicators put into a chart, you will want to use them all because it gives the idea that if you use many tools you get an accurate result.
My advice is to start with the base indicators, and experiment with them until you have validated some results. If you want, you can add indicators, but you can have different strategies based on different indicators. You don’t have to mix them all together, it will be very confusing and quite inefficient. Start simple.
Key takeaway: Start with the simple indicators, test and see what works for you, repeat, perfect your method, then move on. Using too many indicators that you don’t fully understand or don’t have the experience to interpret will make you make bad decisions and lose, instead of profit from your trades.
4.Not understanding how trading strategies work and not using a strategy
This one I see a lot! Strategies are cool. Strategies help you eliminate emotions from trading and they provide you with the confidence that if you follow your plan you will profit in the long run. When you know you profit in the long run you will stop feeling terrible if you make one mistake or if a few trades are lost. It is part of pro trading and all strategies take into account losses, not only profits.
Many people are afraid to see their trade on red, and I tell you – it’s ok. If you are working with a tested method, created and validated in years by a professional trader you should not have stress. You will know when to take profit and you will know when to cut your losses and wait for a better trading opportunity. You will know not to stay in bad trades and HODL in hope it will work. You should not hope for anything in trading, you should just have strategy.
Just a note on the hodl strategy, especially on shitcoins: I observed some pump groups – I dislike a lot pumpers, you know that. Pump and dump is just stealing from people who trust in you. They create the hype (they already bought) you buy in small volume coins and pump it to huge gains and then, after they sell and you are already under value they say – sell guys and if you did not sell on time just HODL. Oh really? Just hodl, what else to do when you lost so much? To hope there will be another pump and you can get back at least what you put in.
Back to strategies – where do you get them from if you are new? If you have time and you are motivated enough – you make them yourself slowly, and test them. If you have the opportunity, take them from professionals, from books, courses and learn to apply them correctly. When you become experimented enough, you will be able to modify them to fit your style better.
Key takeaways: Using strategies you eliminate the FUD and FOMO from your trades, and you are able to trade with confidence by following the rules of your strategy, because you will understand that in the long run, it just works.
5.Being obsessed with R:R or trade wins percentages when they don’t understand how these things work and how they correlate.
I get really funny messages sometimes when I post trades (just an example): Dmitriy why do have such R:R as 1:1 it should be 1:2 at least I read it somewhere.
Simple answer: my strategy works like that, gives me profit and I am happy with it. It’s a cool feeling, I hope you will feel it too if you listen.
I see many people being obsessed with win rates and “correct” R:R.
Win rates and R:R are very easily used as marketing strategies. You don’t have to win every trade to be a good trader. You just need to have a strategy that mixes market conditions with the correct type of trades.
Beginners read in books or online that R:R should be at least 1:2 but they don’t want to think by themselves.
Let’s do some mathematics:
A simple example: if you have 40% of profitable trades Which risk reward should you have to be in profit?
You need a risk reward ratio of around 1:3
Let’s say we have 10 trade where 4 in profit.
4 profitable trade will give 12 points for profit – 4×3
6 loss trade will give 6 points of loss – 6×1
So with this win rate and risk/reward ratio we are in profit in 6 points.
With 40% win rate even we can work even with risk/reward ratio of 1:2
We win 4 trades, we earn 8 points, we lose 6, we lose 6 points. Overall we won 2 points. We’re in profit.
But if the risk reward ratio will be 1:1 and the win rate is 40% we’ll be in drawdown by -2 points.
As you can see we have the same win rate but different results only because of risk/reward ratio is different.
And that’s why people use only the win rate for marketing, let me explain:
It’s cool to say – we have 90% profitable trades… but they don’t say their risk/reward ratio is somewhere around 10:1. Imagine:
We have 9 profitable trade which will give 9 points of profit but then 1 lost trade will give 10 points and the total result will be – 1 point. Oups.
As an observation, a strategy with risk reward 10:1 is a strategy that all of you know – it’s called HODL.
Another point on R:R
A trade with risk reward of 1:2 – is good and looks much better than 1:1.
But can we use it if we trade on trend reversals or we trade in range market conditions? 1:2 will not be the best variant and in that case 1:1 can work better.
What if we are talking about trend market conditions? 1:2 can be used in the beginning and in the middle of trend. Actually, in the beginning of trend it’s possible to use even 1:3, 1:4, 1:5
It is only logical – when you have a lot of space for price movements you CAN use risk reward like 1:2, 1:3, 1:4, 1:5.
So, from this we learn that when you have limits in possible price movements you can only skip trades like that (1:3 – 1:5) or use risk reward ratios like 1:1 or even 2:1!
Do you see now? It is wrong to create in your mind the idea that all strategies should be based on a specific R:R. R:R depends on the market conditions and where you start the trade. That is the reality in trading, and to start trades with 1:4 when BTC is 18000$, is just a naïve dream.
Key takeaways: R:R and win rates are flexible and for a good strategy they depend on each other and the market conditions, and of the point of entry in the trade. Just look at the example above to understand how many trades you need to win depending on the strategy. Then, it will be easier for you to follow strategies of experts. It will also make you get rid of the silly idea that all trades must be wins. If you try to have all winning trades by getting out as soon as you are on red, you will just lose, not win.
There are many aspects of trading on crypto markets that beginner traders overlook. A combination of these overlooked factors and the lack of experience in trading increases their chances to fall into a waterfall of rookie mistakes. I will continue posting some of them, and I hope you will find this useful! However, if you feel like you want to fast forward to learning the trading theory with us and follow our signals and recommendations, feel free to get one of our subscriptions and start learning right away!