Most of the people enter the market with some knowledge.
Still 90% of them end up losing money.
This was asked on Quora more than 4 years ago,
The question and the answer still remain relevant as nothing seems to have changed. Market moves higher, makes new highs but the percentage of traders making losses does not change.
Market participants have some knowledge before they enter the market. What makes 90% of people lose their money?
The question assumes that every participant has knowledge of stock markets.
This is not a fact.
Stock market is a microcosm of the larger society in general. It has its share of bright minds and dullards, high volume traders with huge capital backing them and small players buying out of the money options in the hope of striking it rich. There are speculators, gamblers and the sedate business like scalpers.
But are all of them knowledgeable?
Most traders or even investors lack even the rudimentary trading knowledge. They trade based on tips from assorted advisers through SMS, internet or TV Channels. While doing that also, they follow only one part of the advice i.e. entering the trade. They ignore the stop loss or exit recommended.
Any advice not followed fully is like taking a medicine without a prescription. It does more harm than good.
Losses are the result of such blind trades and the advisers get a bad name for no fault on their part.
The second part of the question is true.
Yes, almost 90% of the traders lose their money.
Why the Loss Happens ? :
There are lots of strategies about trading. There are various charts to time your trade. Without going into the merit of any of theories or strategies, one strategy never goes out of fashion.
Plain Common Sense.
Once you enter a trade ( by whatever strategy or by even throwing a dart on a board), only two things can happen.
Either you will be right or wrong.
You make money when right and you lose money when wrong.
The mismanagement of this simple adage is causing the losses to millions of traders who then tend to blame the markets, the experts, the ruling party, the brokers, all but themselves.
There is only one reason for losses.
Look in the mirror— Yourself.
But it is difficult to take the blame yourself, so the denial continues, more trades are entered and more losses incurred, till the capital gets wiped out.
(a) Taking Small Profits:
There are a lot of traders who scalp small few points gains.
All power to them.
In my view, that is not respecting the markets. When the markets are willing to give you 10% profit, why do you take 1% and exit ?
And then blame the markets when the big loss comes calling.
In the current April 2017 Expiry , Reliance Communication 35 PUT was bought for Rs. 0.75 om March 31, 2017.
Another contract was bought for ICICI BANK 270 PUT for Rs. 2.30 on April 2017.
These are currently trading at Rs. 1.55 ( having touched Rs. 2.05 earlier ) and Rs. 3.95 ( traded at 4.75 also ) . I am yet to close these trades and not sure which direction these trades may take.
A friend of mine who bought same two Options for Rs. 0.75 and Rs. 1.70 has already exited at Rs. 1.25 and Rs. 1.95.
He has booked small profits.
In my view, these were wrong exits.
You had waited while in loss, now the trend has turned in your favour. Why the fear to wait in profit?
This is the tendency which causes the loss.
We take small profits and big losses.
This is the foremost reason for the traders to lose money.
When Right, Sit Tight.
This is a very difficult advice to follow. But who said making money was easy?
(b) Money Management or Loss Management:
Another reason for the markets being full of losing traders is the aversion to exit a losing trade.
It hurts the pride of a trader to be wrong. To preserve that pride, one has to pay dearly. Small losses slowly turn into a bottomless well from which there is no escape.
I will just quote one example of once very popular stock:
From Rs. 546 in 2008, it is now trading at Rs. 5.85 at about 1% of its peak price.
This decline did not happen in a day. There were ample opportunities to book a loss and exit. I personally know some people who hold this stock from 2007–08 and are waiting in hope for revival.
Markets have touched an all time high, but Unitech and many other stocks of such ilk remain at their lows.
Exit a wrong trade/ wrong investment quickly.
A trader should never trade without a stop loss.
It protects your capital as well as keeps you sane for taking up the next trade.
(c) Trading Alone:
Mostly people trade alone. They do not have other traders to seek advice when trades go wrong. It is always better to have one or two other people who understand markets and trading to talk to.
Sharing each others experience will make one a better trader.
I have the personal experience of correcting many of my wrong traders by discussing with a friend whose views I value.
In our society trading is considered akin to gambling, so finding people to discuss trading is little tricky. But it is essential for improvement in your trading skills.
It is not a fact that all people who enter the stock markets come with some knowledge.
It is a fact that about 90% lose money in the markets.
There are ways to get educated and prevent the losses.
But markets are just a reflection of life in general. Good advice has always been there, only takers of advice are very few.
Those who chose to learn will overcome the losses, the rest will continue in their losing ways as ever.
This is how life is and how markets are.
The 90% failure rate will remain.
Strive to be not in this category.
Thanks for reading.
Link to the Quora answer: