Introduction
Stock market trading looks very lucrative when fellow traders share their profit screenshot on social media. The new traders easily get influenced with these stock trades.
This blog post highlights some of the mistakes traders tend to make in their trading journey and end up losing money and how one can try to avoid these mistakes from the very beginning.
Here are 7 reasons why traders lose money in stock market
Over Trading
Over trading is a scenario where one tries to take too many trades in a single day. Traders want to take advantage of every dip and fall.
This is a psychological trait that people don’t want to lose. And in order to recover those previous losses, young traders take another shot to break even.
One trade leads to another and a few more until you have realized that you have traded more than you should. Also,a large chunk of your capital then goes into your brokerage fees and other charges which in turn lowers your capital.
I usually take as low as two trades a month and focus on the price action. My trades are mostly swing trades, and even if one trade goes against my call, I have enough time to plan for adjustments or cut with a loss.
Over trading will only get you on the losing side because you are letting you emotions control you. Every day isn’t a trading day.
Scalping is one form of trading where one tries to get profit out of small price movements. One needs to draw the line between scalping and over trading.
Not understanding proper Risk Reward ratio
Risk Reward Ratio is defined as the the impact of risk one takes for a particular desired profit. In other words, how much money you are willing to lose to get the desired gains. Not knowing the proper risk reward is the reason why most of the traders tend to lose money in stock market as a beginner.
Risk Reward Ratio is calculated by dividing you how much you are willing to lose or square off your trade to the your desired profit.
For example, imagine a scenario where a trader risks Rs. 15/- to make Rs. 45/- as the profit. This simply means that the Risk Reward is 15:45, which can be written as 1:3.
A good trader will always trade with a risk reward of more than 1:2. Before entering the trade one needs to thoroughly write down the extreme values ensure losses are cut at low when view goes wrong and profits are made when view goes in your favor.
Not having a trading system
By trading system, it does not mean a fancy trading set up like a desktop system or a physical set up.
Trading set up is all about the a particular method a trader uses. There are many trading systems and one need not be an expert in every strategy. Having a hold of one or two, and keep fine tuning your ideas and trades, is the right way to create your own trading system.
For example, I like to trade based on moving average crossover, and I have a set defined rules which I follow every time I take a trade.
More info about my trading set up in my coming blogs! Do subscribe to my newsletter to stay undated.
Followings the news media
One of the biggest mistake traders make is follow the news and media related events. In stock market, no news is breaking news. The price action has already factored in all the changes and event related price movements even before the news broke out.
Buy on rumor, sell on news.
The news media can also be biased on a particular stock or can manipulate the people by twerking the truth. This is a common practice where media tries to manipulate the retail investors, who finally end up to lose money in stock market.
The best way to get over this is, avoid watching those news during market hours. A series of post market news or pre market news can be sufficient to get the over all picture of the market.
Trading with high expectations
People in stock market come with very high expectations. Everyone wants to double their money in every trade. One should understand that, higher the returns comes with extremely high risk.
The idea should be to manage your risk first, then go after returns. Always be patient with your trades.
Trading based on emotions
A price of a stock does not go up or down because you are praying for so. In psychology, there is a term called confirmation bias where people make the decision first and then go search for news to support the decision.
Traders in this case usually tend to ignore on the negative news and are only focus on the positive side to back their view.
Only two people can predict the exact support and resistance in the market, God and liars.
One needs to understand the news first, look at both the sides of the story and choose your view. Never be too emotional about your trade, understand your Risk Ratio and trade like a robot.
Trading with a small capital
Trading with a small capital is not a bad thing. On the contrary, it is advised to start start to learn trading with a small capital. So that, even if you lose your money in the learning phase, it does not affect your savings.
If you are someone who wants to make a living out or trading in stocks, I suggest one needs to have at least one crore a base capital for investment.
Trading with moderate risk and a good knowledge of fundamentals can fetch you a return of 15% per annum.
The advantage of having a large capital is that, even smaller rate of return can fetch you large sums to make a living out of it.
Conclusion
Summing up:
| Sr No | Reasons why traders lose money in stock market |
| 1 | Over Trading |
| 2 | Not understanding proper Risk Reward ratio |
| 3 | Not having a trading system |
| 4 | Followings the news media |
| 5 | Trading with high expectations |
| 6 | Trading based on emotions |
| 7 | Trading with a small capital |
I would like to end my blog with this quote:
No one have ever become rich by not losing money in the stock market. The person who has never lost money never became rich.
Do let me know your learning in the comments.
Also read Reasons Why Swing Trading is Better Than Day Trading
One of my all time favorite book on stock markets