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Trading Education: The Fatal Mistake Traders Make

May 23, 2008
Financially Fatal is the best way to describe this particular mistake that 95% of all traders make. It is the primary reason that even though traders are generally smarter than average, the failure rate is incredibly high in trading.

This is the one reason that so many traders fail even though they certainly have the ability and the aptitude to trade successfully. Because of the other factors that come into play, why this happens is very understandable, and it is not very foreseeable on the part of the trader.

Luckily, this situation is one that can be rectified before a person is completely done for in trading. The earlier in a trader's career one can become aware of the phenomenon, the faster that person will reach a level of proficiency and consistent profitability.

Here is an explanation of what happens and what the individual trader can do to turn the odds in their favor.

The Root of the Problem

Trading is very much like other professions in that there is a considerable body of knowledge involved in the activity. While the core concept of trading is very easily understandable by most, trading as an occupation has a substantial body of knowledge to absorb and certain skills that are required to trade profitably and consistently.

As with most professions, there is a gradient to the body of knowledge in trading. There are many different concepts to be learned which are prerequisite for the full understanding of other more complex or in-depth subjects.

To illustrate the problem, let's look at a familiar example: mathematics.

Math begins with simple counting and quantifying, then moves into adding, subtracting, multiplying and dividing. Next come algebra, geometry, and trigonometry. These provide the necessary concepts to then move into such higher math as calculus, differential equations, La Place transforms and others.

If a person were to try to go directly to algebra without a full grasp of basic math, they would be lost. If one enters calculus without a reasonably strong base in algebra, working the problems is difficult at best, and often impossible.

The Fatal Mistake Traders Make

What many traders do is go straight to intermediate level trading without the foundational concepts well developed. They jump way ahead on the gradient.

Now the problem is that when this situation occurs, it affects more than just the ability to assimilate new information. It also creates a physiological effect that interferes with already developed functions because of what is going on in the brain. Effectively it is almost like short-circuiting your brain when trying to operate under these conditions.

This is one explanation why very successful business people will often make decisions in their trading that they wouldn't make anywhere else in their business life. Outside of trading they are brilliant, and are very wise in the ways of money management. In trading they will cause their own losses of thousands or even millions of dollars.

So why does this happen, and why is it so common? In the book, "The Subtle Trap of Trading," the author explains in detail the five factors that come into play that set so many intelligent people on the road to ruin in the world of trading.

There are documented studies on the obstacles to learning that have found that there are specific physiological reactions when a person encounters this particular situation, that of starting too high up in a learning gradient or missing foundational knowledge while trying to grasp concepts at a given level.

This is the fundamental mistake that many traders make, and they are generally consciously unaware of this particular situation and its ramifications. Many people begin active trading without the foundational knowledge to trade at the level where they become active. When this happens, this creates a considerable obstacle to adequate learning within an efficient time frame. Subsequently, the trader often winds up taking a severe financial beating, often depleting their entire account before they have established a sufficient knowledge and skill base to trade proficiently.

Understand, the individual traders are not to blame. This is a problem of the system that unfortunately most have to go through. There is no certification or training required before a person is allowed to put themselves and their money at real risk, so the high failure rate in trading is primarily the result of inadequate warning and preparation for what trading entails.

Avoiding the Mistake (and What to do if you've made it)

Those that are fortunate a enough to pursue the proper guidance and help are the ones that can minimize the effects of this phenomenon which is so prevalent in the trading world. If one can find a mentor that recognizes this particular obstacle and the others that are present in the development of a trader, then chances are likely for a good trading experience. Most however choose to do it themselves or simply make it on sheer persistence alone, while learning the lessons of trading the hard way, through personal experience and substantial losses.

Rather than fall prey to this mistake, as many do, you have the option to save yourself considerable time, losses and personal anguish. This begins with backing up so to speak and making sure that you've got the basics fully covered, and then proceeding forward with a focus on mastery and development.
About the Author
To download your free copy of the powerful report "The Seven Traits of
Winning Traders", go to

You'll also find the book, "The Subtle Trap of Trading", which goes
in-depth into this article topic, the psychology of trading and
much more.
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