This is a very controversial topic among traders. Some believe it to be true while others just don’t accept this fact. But the fact is this: almost 90-95% of traders lose money over the period of 1 year. Even more actually. See the article written by Zerodha founder Nithin Kamath where he highlights almost 99% of traders end up in loss over a period of 1 year. Now, let this fact sink into your mind and let’s explore why this actually happens. I would like to give you the reason, example and my take on each statement.
1. No Strategy
Most traders come into the market having no idea what to do. They come in the hope of making some big money and quick money. Just buy or sell when they think is the right time and just keep on doing it till they get fed up or their capital runs out.
Example: Suppose you come into the market with the hype of making big money. But you have no idea on how many trades you need to take in a day, stop loss for each trade, capital allocation, position-sizing, etc. You’re in a state of confusion and eventually start losing money.
My take: You have to start with less capital and start focussing on a systematic trading plan or strategy. It can be as simple as taking on 5 trades in a day or have a maximum loss of 5% of your capital in a day. These will ensure not only you have started to build a strategy but also to keep you in the market for a longer time. If you are afraid to use real money in the beginning, you can try virtual trades in sites like Chartmantra and test your strategy until you become confident to start trading with real money.
2. Leverage
Almost all the brokers provide leverage to do intraday trades. Leverage is nothing but the broker providing a multiplier capital to your current capital. If you have 10,000 rupees as a capital, your broker will provide 10X times your capital to trades, so now you have 1,00,000 worth of capital to trade.
Example: Suppose you come into trading with 10,000 capital. The broker gives you 10X leverage to trade. Now you are sitting with 1,00,000 worth of capital to trade. Suppose you had a bad day and 5% of your trading capital is lost. This means 5000 of 1,00,000 is gone. But your original capital was only 10,000. Now that 5000 is lost, meaning 50% of your capital is wiped out and now you’re sitting with only 5000 capital to trade. This means you have less capital to trade and high chances of wiping out your entire capital again.
My take: The idea of leverage is to make traders take more trade, indirectly benefiting the broker as each trade costs brokerage to be given. Suppose you start with 10,000. Plan your trade accordingly that you do not lose more than 1% of your capital irrespective of leverage or not. This means whichever trade you take, size your position so that you will not lose more than 100 (1% of 10,000) per trade. And take a maximum of 5 trades per day, 500 rupees (If loss) of your capital. This means you have enough capital (Balance 9500) to trade the next day as well. Also, it means you have to take 100 bad trades to wipe off your capital which means 100 times you have to be wrong. This is a lot.
3. Controlling your emotion
I am pretty sure you must have heard this phrase, “Stock market runs on people’s emotion, it runs on fear and greed”. This is entirely correct in terms of trading. When a stock moves up or down quickly you make very quick decisions based on your emotion. You increase your capital hoping to have a higher profit (Greed). Or you sell off too fast fearing the market will fall more (Fear).
Example: Let's take the example of our COVID-19 pandemic situation itself. The market was going down every day. Each and every day the market was making new lows during 2020. Fear and panic were rising among the people and people started to sell their shares. Even some were thinking the run of bearishness is over and it's time to buy. This is a common case of Gambler’s fallacy and Sunk Cost Fallacy. Thus, controlling your emotion at these times and staying put with your strategy, investments during this time is the key to success. Alas, you can see how Nifty regained its strength back.
My take: We humans are made of emotion. Without this, we might as well be equal to robots. But in order to be successful in the stock market, we need to keep our emotions aside and purely think in logical terms and do things like a robot day in and day out. Once it gets boring and into a routine sticking to your strategy, that’s when you start making money.
4. Trading overhyped stocks
You might have come across stock recommendations. The hot stock in the news. When all the people are talking about the stock and the stock all the people want to trade. These are the hyped and pumped-up stocks. Well, these might be going up in an uptrend spree, but no one knows till when the spree is going to last, actually no one knows.
Example: Let's take a recent example. ADANI stocks. The stock was moving up and up. 300%, 400% returns in a span of 3-4 months. These are the condition where the stock is overhyped in news and stock price fluctuates 4-8% in a day. This is a very risky approach especially if you’re a beginner in the stock market world.
My take: As far as you can, stay away from these stocks. It is best for you and prospering your initial career days into the stock market. Once you understand the fluctuations happening in the market, how the prices are behaving with respect to the sector, nifty and the overall market conditions. Do not try to fight against the market or go against the trend of the market. Always follow the trend and remember “Trend is your Friend”.
5. It takes time to learn, implement and earn
People come into the stock market thinking they can make money right from day 1. Let me start trading every day. Every trade will be profitable and will go according to my plan. You need to remember this; you’re competing against the best of the best in the market. People who have back-tested their strategies for 10-15 years in different market conditions, the veterans and also the big minds (Institutional investors) in the market. They learned and took years of their time and effort to reach in their current position. So, always be patient and humble to our Mr. Market.
Example: If you look into the market, all the traders had their bad times, good times. But most importantly, they didn’t give up on their journey. Let me give you our society as an example. Suppose you’re working in a software company earning 20-25K per month. Think how much time and effort you had done to reach this place. 12 years in school, 4 years in college and few sleepless years in start-up to reach this position. And when it comes to trading, people want to earn this kind of money right from day 1 itself.
My take: Treat trading as a skill. It takes years and effort to master a skill. And once mastered you can effortlessly implement it. Do not get disappointed by your initial setbacks and failures. Just hold on tight and I am sure you will survive this amazing journey ahead. Remember, winners never quit and quitters never win.