Interesting Study by TOI:Indian Retail Investor/trader lost 84000 cores in 18 month period. Thats a Huge sum of money lost by retail traders, so what exactly lead to trading failure of retail traders in Stock market.The difference between success and failure for a trader is wafer thin, Lets elaborate with an example
Amateur retail traders tend to think that the professional trader or Institutional investor have some sort of secret knowledge/system that enables them to make huge profit in trading. However, the difference between a retail traders trying to make consistent profit and a professional traders zeros down to the trading mindset and trading psychology.
Let us give you an example of what we mean. A relatively new retail trader is given a profitable trading system having a trading strategy with proper stop loss and target and the trading system delivers an average success rate of 60%. The retail trader is exited that he has finally found something that will ensure his success. Over the course of 10 potential trades using the trading system it gives a perfect 60% strike rate. However, the mindset of the retail trader can hamper his individual performance.
In this example, the strategy starts out with 2 winners, then 3 losers, then 1 winner, followed by 1 loser and then finally 3 winners so overall, it gives a good success rate.
The problem is that the retail trader doesn’t achieve these results for the following reasons.
- After the first 2 winners, he is very pleased with trading system performance and is on the top of the world thinking finally i can earn profit in stock marke.
- But this happiness does not remains long as after 2 profitable trade he has string of 3 losing trades. These losses jolts his confidence and makes him hesitant of taking any more trades but has not lost hope on the system. Till now he has only 2 winners and 3 losers.
- On the 6th trade, which we know in advance is going to be a winner, the new trader gets nervous and decides to ‘just watch this one to see how it gets on’. When he sees it is a winner, he kicks himself for not taking the trade.
- He takes the 7th trade which is a loser and so his mind starts playing games with him again. At this stage, he has had just 2 winners and 4 losers.
- On the 8th trade, he couldn’t bring himself to hit the button and buy the shares even though he knew deep down that he should strictly follow the strategy. Again, this one becomes a winner and again the new trader kicks himself for not trading this time.
- The 9th trade he takes and wins on but he loses on the 10th trade because he placed his stop in the wrong place (despite where he had been taught to place them).
So although we know the strategy delivered a 60% win rate over the course of 10 potential trades, the individual only managed 30% because he was trying to second guess the strategy (if you just look at his percentage win rate from the actual trades he took then his success rate was still only 38%). It is usually the mindset of the retail trader that limits their level of success. Once they understand the psychological aspects of trading and are able to be disciplined, trading becomes that much easier and consistent profitability is now attained.
If you see an opportunity that meets your criteria for buying or selling a share, do not hesitate as this type of trading is not the path to success. Constant monitoring of trades and learning from any past mistakes is what professional traders do and hence why they make it look so easy. So First Learn the tricks of trade than earn. Educating oneself is the best investment one can do.
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