Why Many Traders Lose Their Profits Soon After Winning

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Why Many Traders Lose Their Profits Soon After Winning

A common scenario experienced by many traders is suffering losses right after having struggled to make gains. Does this ring a bell?

You follow your technical analysis and enter a trade at the right time and win. Then you enter again and win another one, and maybe even another one. It feels like you are well on your way to make some serious gains when all of a sudden you lose quickly and you lose big.

You start scratching your head how did that happen so quickly and where it went all wrong for you. This article will examine why many traders, novice as well as professional, tend to lose their winnings so quickly and easily.

The psychology of winning and the Recency Effect

As many of you already know trading is not only knowing your technical and/or fundamental analysis. It is also psychology. Many will argue that the psychology and the state of mind of a trader is actually more important than any other aspect of trading. Understanding how our brain functions and makes decisions is a crucial element that needs to be addressed.

Psychology tells us that there is a thing called the Recency Effect, a state in which people tend to assign more value to the most recent events and experiences, as opposed to those experiences that happened long ago.

Taking the Recency Effect into account a trader who who has just experienced a big win or a nice streak of wins is much more likely to remember that experience and believe in similar outcome.

Main reason for losing is trader’s overconfidence

The problem with the recency effect is that it plays a dirty trick on the mind and makes the trader lose focus and objective reasoning. Many traders hyped by the recent wins and the recency effect and influenced by the increased levels of dopamine (Read The Worst and the Best Times To Trade Binary Options for more information) are very likely to follow up with the wrong moves and possibly lose their winnings, if not more. This happens to traders very often.

Main reason for losing after having won a few trades is trader’s overconfidence. Overconfidence can destroy any trader without the skills and the know-how to recognize and control it. Overconfidence can make you believe many things which may not necessarily be true.

Defined by psychologists, overconfidence effect is a strong bias in which subjective confidence in your own perception of a situation is greater than the objective accuracy of that perception.

In simple terms overconfidence effect can distort the traders view of what is really happening, and more importantly, it can lead to bold actions that can turn out quite badly. General studies have shown that the margin error of an overconfident subject is about 20%.

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When feelings of overconfidence run through your head when you’re trading it’s a sure sign to stop. A good idea is to look at your trading plan again at this point to refocus your attention.

Virtual money is much easier to part with

When you have $200 in your pocket and you lose it, psychologically it feel more painful that if you lost $200 of virtual money. The reason is that tangible items make a greater impression when they are lost than virtual items that we never touched or used.

Trading profits are always virtual at first, they simply appear as additional numbers in your account. Until your profits are cashed in, they are virtual. Since these virtual profits are intangible, traders are more likely to risk them than if that money was in their pockets.

As a solution, a good advice for traders is to transfer and cash in some of the winnings regularly.

This will keep your ‘head in the game’ because you will need to preserve your baseline trading capital and make new profits. In addition, if you cash in your winnings you will also have a tangible connection to your trading practice in the form of cash.


Without a doubt losing your trading profits can be painful to any trader. The whole experience can be even more frustrating when the profits are lost quickly and recklessly. The situation can be often times avoided by sticking to the trading plan with each trade. Overconfidence is the main cause of errors that lead to losses so try to be aware of your emotional and state of mind at the time of trading. Of course it’s easier said than done but then who said trading was easy.

Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics


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Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics

“95% of all traders fail” is the most commonly used trading related statistic around the internet. But no research paper exists that proves this number right. Research even suggests that the actual figure is much, much higher. In the following article we’ll show you 24 very surprising statistics economic scientists discovered by analyzing actual broker data and the performance of traders. Some explain very well why most traders lose money.

  1. 80% of all day traders quit within the first two years. 1
  2. Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. 1
  3. Traders sell winners at a 50% higher rate than losers. 60% of sales are winners, while 40% of sales are losers. 2
  4. The average individual investor underperforms a market index by 1.5% per year. Active traders underperform by 6.5% annually. 3
  5. Day traders with strong past performance go on to earn strong returns in the future. Though only about 1% of all day traders are able to predictably profit net of fees. 1
  6. Traders with up to a 10 years negative track record continue to trade. This suggests that day traders even continue to trade when they receive a negative signal regarding their ability. 1
  7. Profitable day traders make up a small proportion of all traders – 1.6% in the average year. However, these day traders are very active – accounting for 12% of all day trading activity. 1
  8. Among all traders, profitable traders increase their trading more than unprofitable day traders. 1
  9. Poor individuals tend to spend a greater proportion of their income on lottery purchases and their demand for lottery increases with a decline in their income. 4
  10. Investors with a large differential between their existing economic conditions and their aspiration levels hold riskier stocks in their portfolios. 4
  11. Men trade more than women. And unmarried men trade more than married men. 5
  12. Poor, young men, who live in urban areas and belong to specific minority groups invest more in stocks with lottery-type features. 5
  13. Within each income group, gamblers underperform non-gamblers. 4
  14. Investors tend to sell winning investments while holding on to their losing investments. 6
  15. Trading in Taiwan dropped by about 25% when a lottery was introduced in April 2002. 7
  16. During periods with unusually large lottery jackpot, individual investor trading declines. 8
  17. Investors are more likely to repurchase a stock that they previously sold for a profit than one previously sold for a loss. 9
  18. An increase in search frequency [in a specific instrument] predicts higher returns in the following two weeks. 10
  19. Individual investors trade more actively when their most recent trades were successful. 11
  20. Traders don’t learn about trading. “Trading to learn” is no more rational or profitable than playing roulette to learn for the individual investor. 1
  21. The average day trader loses money by a considerable margin after adjusting for transaction costs.
  22. [In Taiwan] the losses of individual investors are about 2% of GDP.
  23. Investors overweight stocks in the industry in which they are employed.
  24. Traders with a high-IQ tend to hold more mutual funds and larger number of stocks. Therefore, benefit more from diversification effects.

Conclusion: Why Most Traders Lose Money Is Not Surprising Anymore

After going over these 24 statistics it’s very obvious to tell why traders fail. More often than not trading decisionsВ are not based on sound research or tested trading methods, but on emotions, the need for entertainmentВ and the hope to make a million dollars in your underwear.В What traders always forget is that trading is a profession and requires skills that need to be developed over years. Therefore,В be mindful about your trading decisions and the view you have on trading. Don’t expect to be a millionaire by the end of the year, but keep in mind the possibilities trading online has.


– 1 Barber, Lee, Odean (2020): Do Day Traders Rationally Learn About Their Ability?
– 2 Odean (1998): Volume, volatility, price, and profit when all traders are above average
– 3 Barber, & Odean (2000): Trading is hazardous to your wealth: The common stock investment performance of individual investors
– 4 Kumar: Who Gambles In The Stock Market?
– 5 Barber, Odean (2001): Boys will be boys: Gender, overconfidence, and common stock investment
– 6 Calvet, L. E., Campbell, J., & Sodini P. (2009). Fight or flight? Portfolio rebalancing by individual investors.
– 7 Barber, B. M., Lee, Y., Liu, Y., & Odean, T. (2009). Just how much do individual investors lose by trading?
– 8 Gao, X., & Lin, T. (2020). Do individual investors trade stocks as gambling? Evidence from repeated natural experiments
– 9 Strahilevitz, M., Odean, T., & Barber, B. (2020). Once burned, twice shy: How naГЇve learning, counterfactuals, and regret affect the repurchase of stocks previously sol.
– 10 Da, Z., Engelberg, J., & Gao, P. (2020). In search of attention
– 11 De, S., Gondhi, N. R. & Pochiraju, B. (2020). Does sign matter more than size? An investigation into the source of investor overconfidence

Why Traders Give Back Profits After Winning Streaks

How many times have you hit a big winning trade or a series of winners and shortly thereafter given all the profits back and probably even more? I don’t know about you, but this scenario was one I found myself in more than once early on in my trading career, so I know just how frustrating it can be.

Continue reading to find out what I discovered about why traders give back profits and how to put an end to it once and for all…

The psychology of why you are giving back profits…

Whilst there is probably a number of reasons you are giving back your trading profits again and again, there is one thing they all have in common: Recency Effect.

Recency Effect is a psychological phenomenon that describes how people are more likely to remember and act in accordance with events that happened more recently, compared to those that came before. It sounds like it’s just human nature, and it is, but as traders, we need to understand the profound implications the recency effect has on us, if we let.

When a trader focuses too heavily on his or her most recent trading results, it causes them to lose focus and perspective. In trading, it is EXTREMELY easy to become overly-influenced by our most recent trade(s), and this can cause us to do all kinds of stupid things.

Recency Effect is the root cause of why traders give back their profits again and again. The main reason it causes traders to give back profits, is by giving them a false sense of confidence about their trading abilities…

False-confidence: An enemy in disguise

When we become overly-affected by our most recent trades (recency effect), it typically manifests itself by feeling a false sense of confidence.

For example, a beginning trader might get lucky and start out doing very well, hitting a string of three straight winners, which is entirely possible even if they don’t know what they’re doing. Now, let’s say the market conditions at the time of the winners were “easy” conditions; very strongly trending, easy to quickly profit in. Next, let’s say the market conditions change suddenly but that trader just keeps trading because they are feeling very confident following the ‘easy money’ they’ve just made. A lack of education, understanding and trading skill, combined with this false-confidence cause the trader to keep trading, but now the trader loses all the money they made on their three winners.

This type of situation is very common and nearly every trader experiences it at some point. False-confidence will make you feel like you’re smarter than you are, like you have some trading ‘gift’ that ‘other people just don’t have’. Well, you probably do not have such a gift (it’s rare), and when you are feeling like you do, it’s a warning sign you’re about to lose some money to the market.

The key to overcoming Recency Effect and false-confidence, is by remembering that thinking in probabilities is the key to lasting trading success. In other words, we are trading probabilities, not certainties in the market, and every trade is unique and independent from the previous one; so, your previous trade result has no influence on your next trade’s . This is how you have to think if you want to get in the proper trading mindset. It is when you start assigning too much importance to your more recent trades that you lose sight of your trading plan and long-term trading goals and start losing money regularly.

Cold, hard, cash.

There is nothing more real than cold, hard, cash in your hands. The feel and smell is something that creates a sensory connection and as a result, an emotional and psychological one as well. This is quite a bit different than what happens when you are simply staring at digits on a computer screen.

What is my point you ask?

When we never touch our trading money, specifically the profits we make from trades, it becomes an intangible and thus insignificant thing to us. In short, we care less about it.

What easier way to give back your trading profits than if you don’t care about them? I guarantee you if you held $500 cash in your hands and another trader walked up to you and tried grabbing it from you, you would probably punch them in the face, right? But, when that same $500 is on your computer screen and you can’t see who is taking it from you, you simply shrug and feel a little upset at the loss, and maybe chuck another $500 in your account.

Do you see the problem here?

Here’s the solution: Each month, if you made money trading, even if it was $10 profit, WITHDRAWAL SOME IF IT, and go get that amount out of an ATM or from your bank. Set that cash on your trading desk or put it in a jar where you can easily get to it. Take it out once a week, play with it, smell it, whatever. Realize that it’s REAL money and that you really don’t want to lose it! Now, trade in-line with that feeling. In other words, trade defensively, in order to preserve your trading capital, because THAT is how you survive and eventually thrive in the world of trading.


Unnecessarily giving back trading profits is probably the most frustrating part of trading and If allowed to spiral out of control, can trigger an avalanche of trading mistakes that eventually lead you to blowing out your account.

By sharing these insights it is my hope that you avoid a situation where you have grown your trading account and then proceed to lose all your profits. The mental aspect of this event can do long term damage to a traders confidence. It can be hard to recover both mentally and financially from such an event, so it’s very important traders are prepared.

After working with my students over the past decade the most common trait that I see bring down a trader is ‘over confidence’ after they experience a winning period. I encourage people to remain humble and treat each trade and each day the same as they did all those before. There is no room for egos in the market, nor is there any room for hot headed traders who feel the need to prove the market wrong, usually trading erratically to claw back losses or stubbornly holding losing positions.

Helping traders understand what problems they will run into and offering them concrete solutions on how to deal with them is something I cover in my professional trading course.



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