Online trading is gaining popularity among investors of all ages because it offers high returns and has low entry barriers. Most people think intraday trading is solely about choosing the appropriate stocks and making transactions on time. However, how well traders manage their risks and adhere to their trading discipline matters considerably more.
Averaging holdings, not conducting research, overtrading, and paying too much attention to online stock recommendations are common mistakes traders commit. These errors have led to losses for numerous day traders. Let us explore the common reasons why most traders experience financial losses in the share market.
What are the Major Factors Contributing to Traders’ Failure?
In Stock trading, active traders take advantage of short-term fluctuations in price and volatility to make a profit. However, most traders fail to extract consistent profit in the stock market. Here is the list of common reasons that contribute to their trading losses:
- Lack of research:
Inadequate research is the most common reason traders experience significant losses and leave trading. As per research, around 80% of traders abandon trading within two years of starting, 40% within the first month and only 7% continue for seven years.
Most people jump straight into the stock market just by seeing stock-related reels, or following a friend’s suggestions without even being aware of the basics, like the term Demat account meaning, stop-loss orders, etc. Before placing an order, you should always review the stock prices, decide on the volume, and analyse the prior trends and other technical indicators.
- Performing Trades Without a Tested Trading Strategy:
In trading, it is not a good idea to be impulsive. A good trading strategy increases the probability of success in the stock market. A trader must have a thoroughly researched, well-written, and back-tested trading strategy.
A trader should never perform trades based solely on intuition. Plan everything before beginning the trade to not miss any potentially profitable stocks. A solid trading strategy is essential for better returns and lower risk.
- Consider Trading to be a Get-Rich-Quick Scheme:
In a rush to make millions from the stock market, people open demat accounts online and start trading, without conducting research on the authenticity. The Internet is full of scams and luring ads about becoming a millionaire overnight by following a particular trick in trading. These false narratives are leading people to believe that trading is an easy money-making market.
In reality, trading is a tremendously competitive business that requires dedication, knowledge, practice, losses, taxes, uncertainty, stress, and risk. Hence, treat trading as a business, be up to date with market trends, and adjust your approach to changing market trends.
- Not Setting Stop-loss:
One of the prime reasons for trading losses is not exiting trades on time. In losing trades, traders tend to average their losses to convert the losing trade into a profitable one. However, averaging value is a good approach for long-term investment, not for trading. So, before entering trading, always decide on your stop loss, i.e., how much risk you want to take. Using the stop-loss technique effectively is one of the best risk management skills for a trader.
- Choosing Ego Over Facts:
When it comes to losses, ego truly tends to get in the way of trading and investing. Social media and many so-called market experts give the impression that they rarely lose money, and even when they do, it only ever results in “minor” losses. In reality, the contrary is often true.
Every trader should embrace the fact that losing is part of trading and focus on making a profit, not being right all the time. In fact, the top investors in the world have extremely low winning percentages but by a significant margin. The stock market is uncertain, and no one can always predict accurately. Hence, traders should learn how to tweak their strategy as per market trends.
If you want to join the minority group of successful traders, focus on consistency, accurate assessment of the market, and effective risk management skills. The trading world is made up of wins and losses, you cannot deter it. Hence, put efforts into making your losses small and your wins bigger to gain long-term profits.