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Trading in the stock market can be tricky, especially for beginners. According to data from prominent brokers 90% of the beginner trader are supposed to lose money. Most people think it’s the lack of professional knowledge but no amount of training or education can guarantee success in the stock market. Instead, very simple techniques and discipline shape a trader’s journey. You may do enormous reading attend seminars, take expensive courses and make many more efforts but you are destined to lose money if don’t follow some extremely basic principle of trading. Let us explore some of the common reasons for losses in the stock market.
6 reasons why beginners lose money in the market
Poor risk management
Since risk is an integral part of any trade, if it is not well calculated it could turn out to be a big mistake. Most beginner traders know basic risk management but when it comes to implementation on real ground, they do blunders. Some even lose a significant amount of their capital in a single trade. They take big trades and that too with no stop loss and no position sizing.
Lack of discipline
If someone asks what differentiates a successful trader and an unsuccessful one then it is a one-word answer and it is “discipline”. A trader that lacks discipline despite having a solid strategy fails to execute it. He may know what to do but can’t do it. Discipline is nothing but a stringent execution plan that has no scope for deviation from a pre-decided path. The concept of discipline may appear very simple to beginner traders but believe me friends it’s one the toughest skill to master.
New traders start to take too many trades due to a lack of control. There is no exact limit to how many can be called overtrading. However, the number of trades to be taken on a particular day must be limited and preplanned. Losing in a trade triggers anger and greed which in turn forces the trader to take an uncontrolled number of trades. Lack of discipline is again the real culprit here. Overtrading results in higher brokerage charges, and magnification of risk, and may even blow up a newbie’s trading account.
Inability to control emotions
The trading journey is full of emotions like hope, greed, anger, and disappointment. New traders fail to make a balance between rationality and emotions. Emotions influence your decision-making capacity and may paralyze your trading capabilities. Fear can make you run away from a potential trade and greed can make you stuck with a losing trade. With failed trades comes disappointment which may make you either depressed or angry making take the decisions that make you lose further. These emotions make traders paralyzed and think that they can control the market forgetting the fact that the market cannot be controlled.
Hope trading is a result of uncontrolled emotion and lack of discipline. Though hope is the main motive behind any trade but what new traders lack is the inability to come out of the bubble of hope even if their trading strategy suggests so. Even in a losing trade, they hope for reversal which is the biggest blunder and end up losing much more than the decided stop-loss.
Tip based trading
Some new trader even falls into tip providers’ trap which is becoming very common nowadays in Telegram channel and other social media platforms. But relying on these tip providers is the biggest mistake beginners conduct while starting their trading journey. You may make a huge loss and then blame these tip providers for the loss.
We have seen what are the main reasons behind the loss of beginner traders. Now we learn what new traders can do to protect their capital in the initial phase of their trading journey.
5 Must Know for Beginners to Stop Losing Money in Market
Make a Strategy
A solid strategy is needed to become profitable in the stock market. You must set your goal in strategy. Time must be selected at your convenience. It could be a 5-minute, 15-minute, hourly basis, or swing trade. For beginners, swing trading is recommended as requires a minimal amount of time. You can build your strategy based on technical analysis, fundamental analysis, or a combination of both. A good strategy must have a predefined stop loss, risk-to-reward ratio, and entry & exit based on appropriate and back-tested logic. The strategy should be kept as simple as possible in the beginning. Don’t forget to make a log of all trading activity and regular evaluation of the P&L statement.
As a beginner trader, it is crucial to keep control of your mind while trading. You should develop discipline to manage your emotion like fear, greed, and FOMO (fear of missing out). The following tip may help develop discipline in trading.
Focus more on the end goal
Don’t get carried out by turbulences in the market. Just focus on your strategy, stop loss, and target. Keep small targets and don’t fear the loss as it is an integral part of the trading.
Focus more on doable things
No one can control the market. The market is always the BOSS. But entry and exit are always in your hand. Do not get emotionally attached to the trade. Do not hesitate to come out of the system as quickly as possible whenever the market goes against your strategic system.
Take logical approach
Always take a rational and logical approach while trading, It is very easy to get lost in the turbulence of the market. Always keep previous stats and data to draw ideas from and keep updating your learning curve.
Keep proper position sizing
In order to achieve a high return on trade beginner traders start taking big positions on trades that they cannot afford to lose. You should always keep in mind that wrong position sizing can wipe out your capital. You can begin fixed percentage per trade method. This technique involves not deploying more than 2% of your trading capital in a single trade. For example, if have of trading capital of 1000 $ then you should not deploy more than 10$ in one trade as a thumb rule.
Let the trade come to you
One of the biggest issues with intraday trading is that traders end up doing overtrade. Overtrading not only increases the brokerage charges and fees and thus reducing overall return but also leads to emotional and physical engagement with the screen. You should always keep a number of trades to be done on a particular day pre-determined to avoid overtrading and keep entry rules strict. Enter the trade only when it gets triggered in your trading system rather than following random entries based on speculation.
Control your emotions
Uncontrolled emotion can create fear leading to an early exit and greed leading to early entry and oversized positioning. Though learning to control emotions is a gradual process and something which cannot be learned in a day following these methods can be helpful.
Take regular breaks
It is highly advisable to take regular breaks while trading as an exhausted mind hinders logical thinking and can push you to take emotional decisions instead of logical ones.
Not participating in a volatile market
A volatile environment can be difficult to trade for beginner traders. So, whenever you witness a rise in volatility because of financial events, global news, etc. it is better not to trade. However, if you are extremely confident, you can with smaller trades with position sizing less than regular.
Ignoring the P&L window while trading
Continuously watching the P&L terminal can create emotional bias. So, it is better not to look at P&L statements while trading. You should focus more on charts and price action instead.