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Why Most Traders Lose Money

Last Updated: March 11, 2020 By Divesh

Statistics show the popular notion in the trading industry that most traders lose money is real. In this era of the internet, trading is done with a click of a button. Anyone, with or without expertise, can enter, exit, and trade at any point in time.

Hence there is a kind of chaos. Trading is being done randomly, and there is no plan of action based on thorough research of market dynamics.

The motive of most of the traders is to earn fast cash. In a rush to see the profits, traders put their hard made money in risky trades, over-trading, and exiting as fast as they entered into the trade. 

The policies to wait and watch, diversify, and calculate risks have taken a back seat.

Experts have come up with some logical figures by researching on a large chunk of trading data. That would indicate a pattern in the trading activity and behavior as well as highlight the causes of loss:

  • Most traders give up trading within the first two years. This business can only be profitable in the long run. But, 80% of traders lose patience and quit.
  • Day traders have a greater tendency to quit. 40% continue for a month—13 % trade for three years, and only 7% stick on for more than five years.
  • The percentages of day traders who can make a profit and finally have more clear advantages over investments are only 1%. These are the ones who have a history of regular earnings in the past.
  • The most active traders do 12 % of trading activity during the day, and these active ones are those who make a profit. The profit-making traders form only 1.6% of all traders in one average year.

The risk-taking behavior analysis from the data revealed specific patterns:

  • A demographic study shows that men trade more than women. Among men, the single ones trade more.
  • Traders who set their expectations high, much above their present financial situations, hold more risky stocks than those who have goals at par with their economic status.
  • Young, urban living men of the lower income-group invest more in stocks having gambling characteristics.
  • The low income-group men invest a more significant part of their incomes in buying risky stocks. The lesser they earn, the more they spend on a lottery and other speculative means of earning.
  • The performance of the gamblers across all income groups is always worse than those of the calculative ones.
  • Investors buy the stocks that they gave profit in the past more than those which incurred a loss.
  • Investors sell profitable stocks and hold on to the loss-making ones.
  • Most investors enter when the market is bullish; buying stocks whose price is on the rise and mostly at a time when it is already high. But, at that point, the existing investors start selling, making the prices drop.
  • Traders no longer trade to learn. There is instead, a tendency to gamble. In the present time, the propensity to gamble than learn in trading is more.
  • The intelligent investors have more mutual funds a wider variety of stocks in their portfolio. They hold on to them and play in the market for an extended period.
  • The employees of the management see value in their company stocks, hence tend to buy these stocks more.
  • Successful traders have a strategy; they follow the price index rather than their personal views. They safeguard their capital and learn quickly from the losses.

These discoveries show the traders tend to gamble more than doing the trading based on tried and tested methods or learning from long term trading. They are after making quick bucks, which cannot happen in the stock market.

Hence they get frustrated soon and leave. The trading and investing is based on calculated risk-taking strategies, and one can only reap the fruit by developing knowledge and skills over a long period.

At the same time, trading success requires a thorough understanding of sociology-political scenarios and knowledge of how the economy is likely to respond to these events.

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Trading Wisdom

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