Traders Lose Money in the Market

Bear or bull, the market swings up and down. Depending on what trades you make – you can get slammed even in the best of times. Lots of traders do in fact, some financial analysts put it at 70 to 90%. But isn’t the stock market how people get rich? Aren’t half the websites on the internet talking about how much you can make from investing?

All the hype is a contributing factor to the reasons people lose money. Don’t approach the stock market like it’s a get-rich-quick scheme. Those traders end up buying and selling at all the wrong times.

Brokers & Traders

A broker is someone who works directly with clients. He or she will buy or sell stocks, bonds, and commodities as per their client’s request. They recommend opportunities or suggest a client buy or sell an asset in their portfolio. They have to spend time looking for clients.

A professional trader does not work with clients. They buy and sell securities for their portfolio manager. They are assigned to specific client accounts and develop investment strategies behind the scenes. Some traders work across markets – derivatives, stocks, or commodities. Others may specialize in one asset class. They do not develop business or look for clients.

Then there is the day trader. For some it’s a hobby, for others it’s a job. Professional day traders work for themselves or join a financial institution with a trading desk. They monitor the stock market for what’s called short-term market movement. They understand that certain events – annual reports, earnings, interest rates – will impact share prices. They leverage those impacts – large or small – in their trades.

Day trading is controversial. It’s also high risk for what many professionals feel is an insufficient reward. Day traders disagree. The successful ones are highly strategic and very familiar with how the market works. They practice discipline, have the capital to support their position, and can handle risk.

9 Reasons Why Traders Lose Money

Let’s be clear – not all trades are winners. Everyone takes a hit sooner or later – more than once. If you think it can’t happen to you, you might not have the chops for this business. The market is going to be volatile – there will be missed opportunities and bad calls.

That’s not the same as making avoidable mistakes. Here’s our list.

1. Not enough self-control

cartoon panicking

Being a trader requires a certain temperament. Despite the crazy guys you might see on TV – trading is all about self-control. The best traders are calm under pressure. They don’t let their emotions drive their decisions. They keep their eye on the bull or the bear – whichever way the market’s trending.

Making trades requires an investment strategy, whether day trading is your hobby or you work at Goldman Sachs. Sometimes a cliche says it best: Hope for the best, but plan for the worst.

The market doesn’t adapt to you – you have to adapt to the market. That means a realistic approach that understands the risks. Easy to say when the market is up – harder to maintain during a downswing.

If you’re paying attention, stocks rarely fall without some indication as to why. Successful traders are prepared. They know when to ride it out versus caught your losses. Panic is never a good strategy.

2. Go big and go broke

Start small. This is particularly true for day traders – hobbyists and professionals. Be focused. Too many traders start with too many stocks to manage. Monitoring the market, especially during a single day’s cycle, requires diligence. It’s intense – don’t overload yourself.

You’ll miss opportunities, make bad trades and yes, lose money. Discouragement is not easy to overcome. Make good decisions at the start – pick a few stocks and learn from them. If not, you’ll tire of trading before you make any real money.

(Read: 4 Simple Steps to Start Your Investment LLC)

3. Get smart(er)

The easiest way to lose money, start trading when you have no clue what you’re doing. Just reading the Wall Street Journal isn’t going to cut it. One of the biggest mistakes traders – and investors – make is the lack of education.

It’s a strange phenomenon – people who have no background in the industry think they can just jump in. The adrenaline junkies and the gamblers who thrive on risk better learn to thrive on failure. Don’t be dumb. No matter what industry you’re in, whatever job you take on – there’s a learning curve.

Professional traders have at minimum a bachelor’s degree in math, economics, statistics, or computer sciences. The last is an acknowledgment of the role technology plays in the investment process. Just because you can make trades online RIGHT NOW doesn’t mean you should.

There are so many educational opportunities available to learn about the market. All those tools touted by online brokerages won’t help you if you don’t know how or why to use them. Buying “Investing for Dummies” won’t be much help either.

Step back and educate yourself. Take a course on Udemy or this free course from Morningstar. Practice with some paper trades and see how it goes.

Or you can dive in and enjoy learning the hard way while losing big bucks for the privilege.

4. Goals? Plans?

man balancing on arrows

Traders and investors need a strategy. That gets articulated in a financial plan with goals to measure it. A sound strategy includes, a) what to trade, b) when to enter (buy), c) when to exit (sell.) That covers almost everything you’re going to do. If you haven’t stopped to figure out your strategy, you certainly haven’t drafted a plan.

Too often day traders take the “I got this” approach.

Strategy is the foundation for making money in the market. Your goals are milestones, and your financial plan helps you to stay on track. Without a strategy, you’ll buy the wrong stocks. You’ll buy the right stocks at the wrong time. And you will never know when to hedge your bets.

In short, you’re going to lose money.

5. Going it alone

Everyone needs someone to bounce ideas off. For some people, it’s a financial advisor. A financial advisor is an expert who’s paid to help you make financial decisions. (If you need help with that financial plan – this is where to get it.)

Mentorship is a different matter. Mentors don’t charge for their services. They have experience in their field and want to pass along what they know. An experienced trader will save you years of coming up to speed on your own. You get to get pick their brain instead of relying on gut instinct alone.

If you wanna insist on being a lone wolf, have at it. Not smart, but your call.

(Read: Will a fee-only advisor save you money?)

6. Fast, Not Cheap

Most day traders start by looking for the cheapest broker they can find. Why spend money if you don’t have to, right? Here’s why you might need to get a better broker.

Most inexpensive brokers are online service providers. They sit on servers. When traffic on those servers surges, what happens? The servers slow down. You might make your trade, but when does it get to where it needs to be? You won’t find out until it’s too late.

This is true for all investors, but particularly day traders who are watching every small move the market makes. Choosing a broker should be about responsiveness and speed, not just price. You can end up losing more money than you’re saving.

7. Stop Repeating Mistakes

Yes, you’re going to make mistakes. That’s okay, it happens to the most experienced traders in the business. The real issue is how often you make the same ones.

One of the best reasons to create a financial plan is measurement. The same mistakes, over and over, will show a pattern. Are you trying to force a trade? Buying the wrong stocks? Or are you just scared.

Fear of missing out drives a willingness to jump on a stock no matter what it costs. These guys buy at the wrong time. There is always going to be another trade, another buy, another “big win.” FYI – it’s not a big win if you pay twice as much as the stock is worse.

Getting sucked into these situations is costly. If you’re not paying attention to your trading habits, you might just think it’s bad luck…not bad judgment that can be avoided.

8. Volume – What’s That?

You’re watching a stock when the price suddenly shifts – up or down. How do you know if it’s time to jump in? It’s the volume of trades, not the price, that answers the question.

The stock market may not be kind, but it is informative. Every stock shows its current price AND volume of trading. Before you start buying in or jumping out – don’t just look at the price, check the volume of trades.

When you see stock price jumping up with a low trade volume, stop and ask yourself how this could happen. It shouldn’t unless something was happening to hype the stock…oh wait.

The trade volume validates the stock price. Low volume means enter at your own risk.

9. Listening to the wrong people

Most of the mistakes we’ve listed aren’t the first time they’ve been said. They’ve been written about ad nauseum. Go to YouTube and you’ll see multiple videos warning you about common mistakes, even about repeating mistakes.

A smart trader would pay attention. We can only assume if everyone was a smart trader, there would be fewer of these videos.

The people not watching the videos are very collecting stock tips or reacting to stock alerts on their phones. Thumbs up, advice from a total stranger is the way to go. We are fascinated by people who think a stock wizard is anyone with a website. If you’re getting stock alerts constantly, change your settings and re-read #8.

Random stock tips from your dental hygienist or your father-in-law aren’t the way to go. If you read about a new product launch or a pending investigation, incorporate that into your entry/exit strategy.

Build a coalition of trusted resources – a mentor, financial planner, a coach. Smart people rely on those relationships, not tip and phone texts.

Be a Smart Trader

There are honest mistakes and then there are preventable mistakes. Here’s how to avoid them:

  1. Have a strategy. Know what stocks to buy, when to enter and when to exit.
  2. Demonstrate self-control. Keep a cool head and never let your emotions make your trades.
  3. Spend some money on a better broker.
  4. Educate yourself. This is not one of those times where you dive into the deep end of the pool.
  5. Start slow. Don’t take on too much.
  6. Look for an advisor or a mentor. Don’t be a lone wolf.
  7. Volume validates price.
  8. Examine your mistakes so you don’t repeat them.
  9. Don’t let strangers run your strategy. Talk to the right people.

There you go. Happy trading!

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