How Day Traders Lose Money? (Different Ways)

As a day trader, there are several ways you can lose money. Of course, losses are part of successful day trading as well. In this post, we will focus on day traders, who lose money in the long term, not just occasionally.

I understand why day trading as an idea is so tempting; You can work from anywhere and the earning potential is huge. Realistic day trading returns are another thing to consider and how huge the earning potential really is.

Different reasons why day traders lose money

There are several reasons why most of the day traders fail and end up losing money. I will go through each of them briefly. This list might not contain every reason why they would lose, but most common ones.

1. No stop losses or disobeying stop losses

One of the most common reasons day traders lose, is because they either have no stop loss or they simply disobey it.

The phrase “It can not go any lower” or “It can not go any higher” is the beginning of an end to a day trader.

Usually, if you have studied day trading at all, you should know that having a stop loss is essential to day trading. Therefore, the more common reason is disobeying that stop loss.

Fix to this problem is using fixed stop losses. Pre-set the stop loss when you enter the position, and do not move it, at least not to the direction that could cause you to lose more.

If you are wrong and entered a poor trade, accept it and move on. Losses are part of day trading, learn to live with them.

2. Trading for boredom

There are days, when you might not get a single trade placed according to your rules. In this case, it might be tempting to disobey your trading strategy and take a trade anyway.

If you struggle to get trades on a daily basis, maybe it’s time to change your strategy. Do this systematically, not on the move. Remember to backtest every strategy and change before you start testing it with real money.

A single slip when disobeying your trading strategy, combined with disobeying your stop loss can be fatal to your day trading dream. Therefore, it’s important to backtest every change for your strategy and stick to your plan.

That leads us to the next point:

3. Not backtesting trading strategy beforehand

Backtesting your trading strategy before putting it to action, with real money at stake is important. Backtesting the strategy with paper trading can save you a lot of money, and even save your day trading dreams.

If you tested every single strategy with real money, taking huge losses before understanding how the strategy works in different enviroments, you might easily get discouraged.

Learning to trade before risking real money is also important. Strategy and obeying it go hand-to-hand when day trading.

4. Not being familiar with the instrument you trade with

Trading the instruments you have backtested your strategy is another key to success. If, because of boredom or any other reason you try your strategy on other instruments, that you have not backtested your strategy, you might end up losing.

Different instruments work differently. The price movement of a certain stock might completely differ from an index or commodity. Therefore, before you try your strategy on other instruments, backtest it properly.

5. Not being familiar with the timeframe you trade with

Timeframe is another factor, similar to the instrument you trade with. If you have tested your strategy on 15 minute timeframe, moving to 5 minute timeframe the strategy might work completely different.

Before switching timeframe, backtest the strategy on that timeframe properly. This way you can avoid losses. After all, successful day trading comes down to good position sizing and risk management.

6. Locking in profits too soon

It might be tempting, to lock in profits, when you imagine what you could buy with that money. However, the saying goes, “cut your losses short and let your winners run”.

Having a fixed risk-to-reward ratio set up in your strategy, you can avoid cutting your winners too soon, as well as stopping your losses early, rather than too late.

As you progress as a day trader, you could cut off the fixed profit target. However, stop losses are good to have, despite how experienced you might feel.

What portion of day traders lose money?

Estimates say that between 75 and 95% of day traders lose money in the long run. The actual number might be even higher. Let me explain:

There can be various reasons why the estimate differs so much on different studies. That could be because these estimates may not include traders who have already quit, just the ones that are currently active or have been in the past year.

Some studies also use the amount of trades as a metric on who is a day trader and who is not. Therefore, if someone tries day trading and quits before achieving certain amount of trades, they might not be included in the studies.

That is why the range between different studies varies so much, mostly from 75% to 95%. The real number of people who actually try day trading and how many of them succeed can be 1% or less.

In short, profitable traders continue month after month, year after year, while losing traders quit.

Final words

Day trading is a stressful path to go, and definitely not a way to get rich quick. Day trading takes a long time to learn, and even after learning it, the profits are not guaranteed. It definitely is not for everybody.

These are some of the reasons why people fail as day traders. I’m sure there can still be a dozen of ways why someone fails. For example, a cat jumped on their keyboard and executed a bad trade.

Whatever the reason might be, it’s good to know what are the most common tripping points. By knowing the risks, you can avoid them better.

More posts about day trading here.

Hopefully this was helpful to you, have a nice day.

This is not financial or investing advice. Some estimates say that 95% of day traders lose money. Always do your research before risking your hard-earned money.