Why Do Stock Traders Lose Money?

One of the most frustrating things a trader can experience is being dead on right about a trade, taking it, BUT.. still losing money! How can this be? This can happen in five different ways, each of the first four contain a lesson for better planning the fifth way to lose money in this list is just part of the game.

1. You enter your trade correctly and it goes in your favor, BUT… you do not have the right exit strategy to capture your profits and they evaporate due to not having a trailing stop or waiting to long to exit to bank those profits. Sometimes winners even turn into big losers win not managed correctly. You have to have a plan to take profits while they are there.

2. You enter the right trade BUT… at the wrong time, you either exit not allowing your trade enough time to work or you are stopped out but do not have a plan to get yourself back in the trade with the right set up. The right trade with the wrong timing pays nothing.

3. You have the right entry and it goes in your favor BUT.. you pick the wrong stock option to express your trade. If you pick an option with a high implied volatility your trade has to overcome that vega priced into the option, after an expected earnings event that vega value will be priced out and you need the move in intrinsic value to make up that difference. With a far out in time stock option you need the price to move enough in the underlying in the time period of the option to make up the theta cost of time embedded in the option. It is crucial to understand the option pricing model to make the right option trades to express your time period and expected move. Sometimes options also do not have the liquidity in some stocks,or far out time frames, or far out of the money strikes. Getting in and out of an illiquid  option trade can be very expensive.

4. You enter correctly BUT… get stopped out too soon because your position size is just too big and either you stop out from a monetary loss above your risk threshold or your fear of big losses stops you out. Trade the right size for your risk tolerance and give yourself some wiggle room.

5. Your trade can be perfectly timed and executed and it can immediately go in your favor BUT… an unexpected news headline about your company, interest rates, commodity, or macro can still cause you to lose. Nothing you can do about this one but move on the next trade. The other four can be great lessons in how to be a winner the next time around.

Failing to maintain discipline of stop losses and profit targets

Like it or not, discipline lies at the core of intraday trading success. Trading is less about returns and more about managing risk. This is all the more true with reference to intraday trading. You cannot enter an intraday position without a pre-defined stop loss and profit target. Ensure that the risk-return is favourable to you in the long run. But above all, trading is all about discipline. From the way you place an order to the way you economise on costs to the setting of stop losses and profits targets; the entire intraday trading game is all about discipline. In fact, this is where most of the intraday traders falter!

Intraday traders have very little time to react to the market.  So, many of them often hit the panic button too early when the market is choppy. It is a common trait, especially with new traders. Remember, when you panic and sell, you compromise your profit potential, which benefits traders who don’t panic. Day trading requires a certain amount of courage and risk appetite to digest market volatility.

The key is to observe the market and not to panic when the market is volatile.

Focusing on being right rather than on making money
There is a subtle difference being right and being in the money. Let us start with a rhetorical question. What is the difference between an analyst who predicted the Nifty direction 9 out of 10 times right as against another analyst who predicted only 6 out of 10 times right? The answer is that there is no difference because both did not make money on the trade. The focus of the intraday trader must be on making money on the trade and not whether the bottom and top of the market was caught. The intraday trader needs to be crystal clear that the core focus is to make money. Period!