Did you know that 1 out of 10 traders loses money in the financial markets when trading?
Despite the damning statistics and the inherent uncertainty in the outcomes of trading, traders continue to take the risk and invest their money with the hopes of getting a return.
Experienced traders and stakeholders have highlighted several ways in which traders lose money. From this information, we have selected top ways traders fail that can assist you to avoid making the same mistakes.
Trading to learn
Most traders who have sustained losses from their trading experience acknowledge that they started trading without receiving any formal training from a professional. Armed with only the basic information about markets, some people invest and start trading hoping, ignorantly, that luck will be on their side. Instead of learning how to trade, these investors begin trading to learn how the markets work. This reversed prioritization of events leads to insurmountable losses, making it harder for the trader to ever recoup the lost money.
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Risk management
Understanding the risk level of a trade and the risk category that investments are placed is the first step to avoiding losing money when trading. Conducting a risk assessment of the investment opportunities in the market enables a trader to determine the leverage that they hold against the investment and whether it is worth placing a wager using the leverage. Without a risk assessment, a trader may place a wager on a portfolio that has a high-risk premium and ends up losing the leverage among other losses.
Money management
Lack of money management skills, traders hold on their stakes for either too long or release them too fast. Therefore, despite making a profit from a transaction, the trader ends up losing money.
Transaction costs
Like any other investment, trading has its operational costs that have to be factored when generating a profit and loss statement. A trader may lose money despite having a positive return in a trading period based on the costs incurred over the period. The adjusted transaction costs deducted include taxes, commissions, and utility bills, among other resources including time spent trading and conducting other activities related to the trade.
Tools of the trade
Markets are time sensitive and data-intensive platforms. Traders who have appropriate data at the right time are more likely to win than the others in the same market. Lack of tools for efficient data analysis and communication causes some traders to make trade decisions ex-post. For example, having a slow internet may hamper the trader’s efficiency and hence a trader will make decisions using delayed data feed.
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Discipline
Lastly, traders lose money because they lack a trading strategy or if they have one, they deviate from the plan. For example, a trader without a diversified portfolio is likely to lose money because of lack of risk spreading. Consequently, trading without a limit order or a take-profit order exposes the trader’s positions to further risk of losing money with the hopes of a ‘miracle’ at any time.
So how do I avoid losing money?
With the basic information on how traders lose money, it is paramount that you understand the best way to avoid these predicaments by learning how to become a successful investor.
