Why Do Traders Lose in Financial Market Part-II

In Continuation of Previous Post

Fatal Flaw No. 4 — Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month…I promise.

Fatal Flaw No. 5 — Lack of Money Management

The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% – 3% of their portfolio. If we apply this rule to ourselves, then for every  Rs 50,000 we have in our trading account, we can risk only 500 – 1500 on any given trade. Stocks might be a little different, but a 50 stop in Nifty , which is one point, is simply too tight a stop. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between 150,000 and 500,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the “aim small, miss small” movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading Nifty contracts or even stocks in cash market. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out altogether.

Break the Hand’s Grip

Trading successfully is not easy. It’s hard work…damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless.

To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

2 thoughts on “Why Do Traders Lose in Financial Market Part-II”

  1. For 3 lakh, you can risk Rs 3000-6000-/- maximum on all of the trades you have taken . Rule is never utilize more than 1-3 % of account size for any trade . Of course , for a retailer this is difficult . But, split it into 3 -1lakh for stock/nifty futures(never go for lot size more thant 125 in stocks- Nifty 1 lot only for 1 lakh,u can add one more during intraday only). Then 1lakh for option-utilize to trade only 1-2 lots with tight SL for options as this is the one that erodes money very fast ; no overnight option positions, if so protect on both the directions, the rest 1lakh for equity -risk 1000 to 2000 on all the equity positions u take, for e.g., if u buy TATASTEEL @ Rs 550 for a target of Rs 590 and your SL is Rs 535, then ur risk is Rs 15 . Divide 1000 by 15 which gives 66 shares=66*550=Rs33500-u have invested 1/3rd of capital now and 1 more % risk u can find for opportunities . You can even reduce your qty to 33 and go for another counter , At any time ur open postions should have risk only 2% of Rs 100000-/- for equity/FO/Options

  2. Superbly return article bramesh sir….. just query regarding above article….can you give rough idea suppose person has 3 lakh capital. ..what should he trade? Like stock future or nifty future….suppose nifty future than maximum how many lots.? Etc….I usually trade stock or future with covered call or protective put upon situation.

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