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Why Trader Fails

The trading profit, not counting the random component, is the sum of two sources: risk premium and unique ability premium.

Thus here are some reasons why the trader may underperform the market:

1. The trader over-estimates the uniqueness of its abilities. Most traders read the same books, use the same software, make the same mistakes, share the same delusions. Nevertheless, each and every one assumes he has an advantage over other.

2. The trader makes decisions requiring a high level of professionalism, while not being a professional. Money tends to move from those who think they are good to those who actually are good. So the trader expects the ability premium, having only an additional risk premium, and eventually he gets an unexpected risk realization. Consequences - points 3 and 4.

3. The trader under-estimates the risk taken. Consequences - points 6 and 7.

4. The trader over-estimates the future profits. Consequences - point 7.

5. Too frequent trades - accumulation of transaction costs.

6. Too much leverage - accumulation of compounding costs.

7. Too tight expectation frames on drawdown depth and time. Sooner of later the market drives the trader beyond those frames where the trader starts to panic, makes stupid things and most of the time changes his strategy, thus fixing old strategy losses.

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