Every year lakhs & lakhs of new demat accounts are opened in India. A lot of new traders come into the stock market with the hope of making a big impact to their financial situation. However, most traders end up losing their money in the stock market. As per most studies, over 95% of stock traders end up losing money in the stock market. But why does this happen? What are the mistakes which new traders make?
1. Trying to make money in every single trade
This is the easiest mistake to make as a new trader because it looks the most intuitive. The goal of a trader is to make profits in the stock market. So, you should try to make money in every single trade, right? WRONG! It is impossible for any trader to make money in every single trade. The entire concept of trading is make more money than you lose!
Trading is very different from any other business or job because the goal in trading is not to make money everyday. There will be days in trading in which you will make a lot of money, however there will also be days where you will lose money. Your goal as a trader is to get the full profits from your winning trades & lose as little as you can from your losing trades. It is very difficult to lose money in trading in the long term if you follow a strict stop loss and take trades which have 1.5:1 or higher reward to risk ratios. To learn more about a trading system for profitable traders, visit this article!
2. Losing more than they are making
Many new traders take trades without following any system or guidelines. Their goal is simple – to make money! However, as discussed previously there will be many instances in which you will face losses while trading. Most new traders make the mistake of losing a lot more money than they need to lose. Think about it – if you have a winning trade and a losing trade, you will most likely book your profits on the winning trades & hope for the losing trade to turn around. The problem with this strategy is that there will be some losing trades which will eat up profits from more than 10 winning trades! Imagine being right 80% of the time while trading & still end up losing money.
It is completely normal for a stock trader to have barely 50% trading accuracy and still be profitable in the stock market if trading rules are strictly followed. Always exit at stop-losses to limit your losses & always look for higher returns than you risk! To learn more, visit this article – What is a good win rate for profitable traders?
3. Not accepting your mistakes
This is a problem not only amongst new traders but veterans too. When you take up a trading position and the stock doesn’t move as per your expectation, it is very difficult for traders to cut their losses. Not being able to accept their mistake causes a trader or investor to stay in a trade even if they lose their entire trading account for it! Mistakes like this can blow up the entire trading capital for a stock trader. This is exactly the reason why traders strictly use stop-loss! A stop-loss is an act where a trader accepts his/her mistake and gets out of a bad situation before any major damage has taken place. It is impossible for anyone to predict the stock market. Therefore, everyone who has ever stepped foot in the stock market will make some mistakes along the way. it is okay to make mistakes in trading, but it is a crime to stick to your mistakes! If you want to know why nobody can predict the stock market, visit this article!
4. ‘Trying’ new strategies after few consecutive stop-losses
Every trading strategy (regardless of its complexity or advanced nature) has some flaws. There will be times in which you will apply your strategy perfectly, but you will end up hitting multiple stop-losses in a row. This is the point where many traders lose hope & end up doubting their trading strategy. This is a big mistake because this generally leads new traders to new strategies instead of focusing on perfecting their own strategy. There will always be scenarios where you will end up losing all hope on your strategy due to consecutive stop-losses. This is where you need to understand that such phases are part of the trading game.
5. Revenge trading / Trying to ‘recover’ your money
Revenge trading refers to a trader focusing on the same stock in which he/she has lost money to try to ‘recover’ his money. The ultimate truth of stock trading is that it is IMPOSSIBLE to recover your money. If you lost money in Reliance Industries, then going after the same stock to ‘recover’ your money will almost always lead to more losses. There is only one way to ‘recover’ your money. It is to make more than you lose!
There is absolutely no reason to go after the same stock after you have lost money in a trade. It is absolutely okay for a trader to lose Rs. 1000 in Reliance Industries & make Rs. 1500 in HDFC Bank, thereby making a total profit of Rs. 500 in two trades. There should not be any emotional attachment to any stock and trading positions should be made only based on your trading system. You can only make profits and losses in the market, there is no possibility to ‘recover’ your losses.
How to avoid these mistakes?
The simplest way to avoid such mistakes in the stock market is to have a set of rules which should be strictly followed at all times. It is critical for traders to have a proper trading system before attempting to trade in the stock market. Here are a set of rules which every trader should follow –
- Decide your stop-loss and target before entering a trade
- Always exit at Stop-loss
- Trade only based on stock charts, not news
- Winning trades should make more money than losing trade (over 1.5:1 reward to risk ratio)
- Never risk more than 1% capital in any single trade
To learn about a profitable trading system for beginner, visit this article!
Conclusion
In a place where 95% of the participants lose, even a few mistakes can cause a trader to go from a profitable trader to an unprofitable trader. Avoiding all the above mentioned mistakes will make a trader perform much better in the stock market and make higher profits. However, the final decision on trading depends entirely upon the reader!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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