Did you know that 1 in 10 traders lose money in the financial markets when trading?
Despite the damning statistics and the inherent uncertainty of trading results, traders continue to take risks and invest their money in the hope of a return.
Experienced traders and interested parties have highlighted several ways that traders lose money. From this information, we have selected the top ways traders fail that can help you avoid making the same mistakes.
trade to learn
Most traders who have suffered losses due to their trading experience admit that they started trading without receiving any formal training from a professional. Armed with only basic information about the markets, some people invest and start trading hoping, ignorantly, that luck will be on their side. Instead of learning how to trade, these investors start trading to learn how the markets work. This reverse prioritization of events leads to insurmountable losses, making it difficult for the trader to recover lost money.
Risk management
Understanding the risk level of a trade and the risk category in which investments are placed is the first step in avoiding losing money when trading. Carrying out a risk assessment of investment opportunities in the market allows a trader to determine how much leverage they have against the investment and whether it is worth betting using the leverage. Without a risk assessment, a trader may bet on a portfolio that has a high risk premium and end up losing leverage among other losses.
Money Management
Due to a lack of money management skills, traders hold their bets for too long or release them too quickly. Therefore, despite making a profit from a transaction, the trader ends up losing money.
Transaction costs
Like any other investment, trading has its operating costs that must be taken into account when generating a profit and loss statement. A trader can lose money despite having a positive return in a trading period based on the costs incurred during the period. Adjusted transaction costs deducted include taxes, commissions, and utility bills, among other resources, including time spent trading and performing other trade-related activities.
tools of the trade
Markets are time-sensitive and data-intensive platforms. Traders who have the right data at the right time are more likely to win than others in the same market. The lack of tools for efficient data analysis and communication causes some traders to make trading decisions ex-post. For example, having slow internet can hinder the merchant’s efficiency and therefore a merchant will make decisions using the delayed data feed.
Discipline
Lastly, traders lose money because they lack a trading strategy or, if they do, they deviate from the plan. For example, a trader without a diversified portfolio is likely to lose money due to a lack of risk spreading. Consequently, trading without a limit order or a take profit order exposes the trader’s positions to a greater risk of losing money in the hope of a “miracle” at any time.
So how do I avoid losing money?
With the basic information on how traders lose money, it is essential that you understand the best way to avoid these problems by learning how to become a successful investor.