The 90-90-90 Rule of Trading

The 90-90-90 Rule of Trading is a harsh reality check, especially for new traders. It simply states that 90% of traders will lose 90% of their capital within 90 days.

This pill can be hard to swallow, especially when we make it seem so easy, often times saying as much. Statistics highlight how many new traders fail due to common mistakes of missing the importance of discipline, strategy and emotional control to avoid becoming part of the vast majority who succumb to the lure of a quick dollar. The stock market takes no prisoners and will reveal more about yourself than you could ever care to know. No trader is left unscathed. The question is, will you be part of the masses, or of the thin slice that actually makes money on a consistent basis?

Reasons for these all-too-common failures are:

Lack of a plan: without a clear, tested strategy with specific entry and exit points or a risk management plan, the trader is doomed from the outset.

Emotional trading: impulsively chasing trades through fear, greed, ego, fear-of-missing-out (FOMO) or you-only-live-once (YOLO) mentality will undoubtedly remove cash from the emotional trader and secure profits for those of us in control.

Poor risk management: putting too much capital on any one trade will lead to significant losses that can wipe out a trader’s account quickly and decisively.

Unrealistic expectations: anticipating getting rich quick always leads to frustration and failure; long-term success is a marathon, not a sprint.

Lack of discipline: the failure to stick to a pre-defined strategy and manage risk is a primary reason for failure.

Lack of patience: like discipline, there are times to act and times to hold on and wait, failure of which inevitably leads to self-destruction.

Trading as a profession, or even as an exciting hobby, requires patience, discipline and an understanding that this is not a “get rich quick” scheme. It also takes time to develop these skills. Think of trading success as a career or vocation.

How to avoid the 90-90-90 trap:

Educate yourself: never stop learning, studying, testing and mastering the reasons markets move as they do. Learn the fundamentals of your trading instruments and never underestimate the power of using a paper account.

Develop a plan: create a viable strategy that works for you, your schedule, your temperament and style. This is not a “one size fits all” endeavor. Our strategies work for us, and they have for many years. Perhaps they can work for you too.

Manage risk: never risk more than you can comfortably afford to lose. Some traders keep their investments to 1-2% of their capital. I tend to risk a little more, depending on my confidence level.

Control your emotions: never marry your stock; they are your employees, not your life partners. Master your emotions to control your trades, lest they control you.

Be patient: markets do not move in straight lines up or down. They zig zag, and sometimes you will need to roll with the flow. Treat trading as a business, not a gamble.

Keep a log: it need not be elaborate, but with enough detail as to track your activity and preferably what you were thinking when you entered and exited. Think of it as your roadmap to success.

Learn from your mistakes: keeping a log is one thing but study it with the aim to stop doing what created losses. Eventually, all that is left is what makes you money.

You will never go broke taking profits. Take what the market gives you, step by step. Take small gains, prepare for the next setup and re-enter the arena. Think of it as a boxing match with 12 rounds. You may win some, lose some, but aspire to win by the end of the day.

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Create great trades!

Hugh