99 percent stock traders lose money in trading and honestly I was one of them.
Trading is very lucrative 20-30 percent gain in matter of few days with little technical analysis attract many novice investors. But it is not true trading really a hard game as it require tremendous market expertise in market large data processing ability discipline and complete focus.
There are some mistakes that most of the stock trader make in market make in haste to be millionaire overnight and after reading this post you will know what are those.
Honestly to make money in stock market you don’t have to enter exactly at the bottom in stock and exit exactly at the top nor it is possible for any person. (anyone claiming to do so is surely bluffing ).
But then also trader enter in market with a intention to do that. Yes there is no wrong to try to catch bottom but the problem is with intention.
This intention makes trader apply completely wrong approach of trading and thus make mistake that cause great losses. While entering into market trader must accept harsh reality that bottom fishing is not possible thus rather to focus on buying at reasonably low prices(with experience trader will understand what is reasonable low prices for trade of that particular type).
Averaging down is reducing per share buying cost of share by buying more share when stock prices falls below initial buying price.
Mr.X buys 100 shares of Amazon Inc. at 1000$ per share. But after buying few days stock falls to levels of 900$. Now Mr.X is panicked but he still think share price can go up so he buys 100 more shares at 900$ per share.
Total amount of share Mr. X has is 200 with total investment of 190000$. Average cost per share is 190000/200 = 950$/ share.
As you can see because of second buying average cost per share decreased to 950$ to 1000$. Thus the cost per share is averaged down.
Why this process is very attractive to traders is because it reduces loss per share . As in present example loss per share is reduced to 50$ per share from 100$ per share.
If you are long term value investor then averaging down can be good strategy because you basically betting on irrationality of market. But in trading I think averaging down is worst idea I have ever seen.
No matter how expert and experiences trader is not all his traders will hit bull eye. Even the most successful trades are success ratio 55-65 percent. So trader should expect that almost help of their trade are going to be wrong.
Thus sensible strategy is to get out of wrong ones quickly and stock to winning trades .
Averaging down will cause more loss if stock do not review also it will put more emotional strain to hold for more period of time as now there is large amount at stake and this will bring another loss Opportunity Loss.
Some transaction cost applicable to trade shares.
- Securities Transaction Tax.
- Brokerage Fees.
- Depository Fees.
- Capital Gain Taxes (Only in case of profits.)
- SEBI Charges.
- Goods and service charge.
- Exchange Transaction Tax.
All these cost totals to more than two percent of position amount.
In long term investing turnover of portfolio is less and profit or loss is large compared to that cost, So brokerage might be ignored but in case of trading frequency of trade is very high thus is turnover.
While taking any positions trader must take decision considering loss that is happened due to cost of transaction. Also while calculating total gains transaction cost must be considered otherwise trader will get misleading figure of performance .
Mr. Enthusiast makes 10 intraday trades, his 6 trades are profitable and 4 in trades he loose 2 percent each. Average profit in winning trade is 5 percent. (all trade are of equal amount )
what is total gain of Mr. Enthusiast.
|(+)Total gain in profitable trade||5%*6 trades = 30%|
|(-)Total loss in loosing trade||2%*4 trades = 8%|
Wow a staggering 22 percent gain in one day. But wait a minute where is transaction cost.
Transaction Cost = 10 trades * 2% per trade =20%
Now gains are reduced to 2%.
This type of miscalculation happen when we exclude cost of turnover.
As I discussed before that trader should never expect all this trade to be profitable and consider from the very beginning that almost 35-45% trades will go in red.
When trades goes in red our greed overtake rationality because of which we give false consolation to us that hold a little more stock will review. This causes even more loss to trader.
That is why predefined stop loss is very much important in trading. But more important is discipline to execute sell order when price hot stop loss.
Trailing stop loss.
Sometimes in trading we decide our target . Our trade hits target and we get out in fear of losing what we have gained, but after that stock moves far more from there.
To avoid this I recommend to apply trailing stop loss when trade hits the target this confirms our gain upto target and keeps opportunity of further gain open.
Betting On Every Opportunity
Every day thousands of opportunities are created in market. That doesn’t mean we should jump on every opportunity we see.
Novice trader make same mistake. Not every trade in market is worth betting. This may be because lack of understanding of field very poor target to stop loss ratio, late in processing information and so on.
Trade With No Research
People hear stories of how his neighbor made 30 percent profit in a day or they listen to interview of some odd lot trader who made millions in trading.
This create wrong perceptions in mind of new traders in market that trading is simple and very easyand they do not have to do much more things just read chart and make money.
This makes trader to take huge position without proper research and analysis, thus they loose money.
This is the most important cause of losses in trading no matter whether you are novice trader or experiences trader you will get irrational in decision making due to emotions.
So it is very important before every decisions to sit back and think whether any emotional biasness is unconsciously causing irrationalness in that particular decision making .
There are certain emotions which subconsciously influence our trading decisions :
Fear: fear cause us to get out of profitable trade too quickly thus hindering our profit potential.
Greed: Greed of profit make us to bet huge amount on wrong trade .in greed we become ignorant to negative aspects of analysis and give high emphasis to positive ones.
Envy: When our fellow trader make more money than us then no matter how good our own result is we try to get ahead of him . in process we make some serious mistakes which cause us our previously earned profit.
Depress: When our back to back many trades goes wrong we feel very depression we loose our concentration which is must in trading .fear overcomes us in such a way that we become so reluctant to take action that we don’t even notice unbelievably great opportunities in front of us.
Part Time Trading
Believe me or not but bitter truth is trading is far more difficult than long term investing also far more difficult than one think .
It require great concentration, highly intelligent mind to process vast amount of data, emotional control to take rational decisions when numbers are moving fast in front of screen.
Because of this part time trading is very bad idea. Yes, you can be part time investor but it is not possible in trading to be profitable with part time.
Reality is much more different than brokerage houses show in their advertisements. That one person who is office employee open his smartphone while standing near coffee machine take a look at any random stock think not even for not even one minute and take a position and make few hundred dollars in matter of minutes.
Day trading is structurally worst concept for traders (although it is great concept for brokers).
because of following reasons .
- Gap up and gap down in opening.
- Limited potential.
- Less volatility.
- Very Less profit potential/ brokerage ratio.
- Light speed decision making.
- Influence of large institutional trade on daily prices.
- Lack of fundamental and technical backing in decisions making.
- Almost no time to do homework.
Trading on Tips
If a person or institution really knew where stock price is going to go then he would have became a billionaire himself .
When any novice person came in market he does not even have ability or understanding to judge who expert is and he think that person looks very confident so he surely know much about market . But trust me no one is expert in market . So trading tips giving institutions are great markets or sellers who convince many to follow them.
and give them hefty fees but they don’t know anything extraordinary about market.
When I used to watch business news channel I got surprised that there was a market experts whom audience would ask question and that person was giving advice on all of the random asked by audience.
How it is possible. Why this person is in Forbes richest list.
If any trader consecutively make money in some of his trader then he considers himself next Warren Buffett or Paul Tudor Jones. He thinks everything that he touch will turn into gold and now just one thing he lacks is capital and in this way he decide to use margin to amplify this results.
But there is nothing dangerous than borrowed money in the market .
Interest charged on margin money as I know is nearly 18 percent per annual which matches return record of world’s greatest investor Warren Buffett of 19 percent .
As I said earlier leverage magnifies result it became two edge sword and could wipe out your whole account in one of two trades only.
When we work on basis of borrowed money there is pressure of closing trade sooner to save interest cost so trader can make huge mistakes in order to do that.
Emotions which we discussed earlier are more active when you trade on margin thus a loose loose situation is created.