Most traders lose in the Financial market
Over 95% of Financial traders lose money when trading the markets (stock markets, Forex markets, or the Commodities markets), and the reasons behind this trend can be categorized into five (5) distinct groups. Even though Every trader at some point in his/her trading journey will lose some reasonable part of his capital or all of his capital (Blow his account) on his journey towards trading the market successfully, it can be said that some traders can as well navigate the Financial market without having to go through this ordeal and this is due to the fact that they avoid the five (5) reasons why financial traders lose money while trading the markets.
The five (5) reasons
1. High Transaction cost:
Trading comes with some sort of cost, and this cost is called Transaction cost. The transaction cost could be in the form of a spread or commission depending on the type of broker the trader is using for his trading activities. Now when I say transaction cost is one of the reasons why traders lose money while trading, some people will ask how? This question can be answered with a simple example. Let’s take a look at a simple example below.
Assuming you have a $1000 trading account and for every transaction (Buy or sell) you make, your broker charges you $5 per transaction. Then let’s assume you make 40 transactions in a month, your total transaction cost will be: $5 * 40 = $200 per month. Out of your $1000 capital, you will have $800 to continue trading with for the next month. This means that for you to make profits in the market, you will have to rack up profits in excess of $200 per month, which is over 20% of your capital ($1000) consistently, and the solution to this situation is to conduct your trading activities via a broker that charges low transaction fees ( low spreads or low commissions per trade) and the situation will be worse when you make a Net Loss in a month instead of a Net profit i.e. losing trades > winning trades.
2. Trading journal
A trading journal is the most effective tool used for trading performance management. A trading journal is where you record and review all trade setups and also record all executed trades for better output and for future reference. A Trading journal is very important because it can help a trader track his progress as well as study mistakes made when planning or executing a trade. Most traders do not keep a trading journal, and hence they miss out on very important information that will help them to be profitable and not lose more money than they should. This is because trading journals contain information such as:
- date and time of trade
- direction of the trade
- commodities, stocks or currency pairs been traded
- market trends
- position size
- entry and exit prices
- trade results
3. Poor Trading strategy
A Trading strategy is a Trading plan designed by a Financial trader and this plan is based on set rules that help the trader make informed decisions like; when to go long, when to go short, when and where to exit the trade. Generally, the sole purpose of a trading strategy is to help a trader make a profitable return from the market whenever he goes Long or short. Trading strategies after Trading Journals can make or break a Trader because without a strategy every trader is like a fish on dry land and what this analogy means for the trader is that the trader will not last long enough in the financial market. Some traders, especially newbies, dive right into the financial market without developing a proper strategy to use, although it is not just enough to develop a trading strategy, it is also very important that you backtest every strategy before launching them in the live market ( your live trading account). The summary of this reason is that every trader without a trading strategy stands a very high chance of losing a lot in the market when compared with a trader with a proven trading strategy.
4. Bad risk management
Risk management is the term used to describe the act of identifying, analyzing, and controlling potential risks involved with Financial trading i.e. stock trading, forex trading, and derivatives trading. When these risks are either not identified, analyzed, or controlled, it will have a very negative effect on the equity of the trader, and such negative effects translate to huge losses and, in some cases, complete loss of trading accounts. As mentioned in my previous articles, Risk management is the most important skill that any successful trader must master in order to remain profitable in the long-term while trading. Bad risk management = loss of equity.
5. Excessive trading
Excessive trading is the act of trading outside one’s trading Journal/ trading strategies just with the aim of making more profits. This act has caused many traders to incur excessive losses that could be avoided if only they stuck to their trading strategies. Excessive trading is very exhausting and can as well result in emotional breakdown for traders as well.
Although the Financial markets run 24/7 per week, not all times or days are good times to trade. There are some very good times when there is a reasonable amount of Volatility in the Financial markets ( to be discussed in subsequent articles ) and some bad times when the market lacks direction.
Trading at times when the market lacks direction is like trying to sail a ship across shallow waters, so it is best to avoid these times entirely.
Losses are a norm in the Financial Markets but the ability to manage the losses is a very important skill that every trader must possess. therefore every trader intending to be successful must thrive to avoid the five ( 5 ) reasons why Financial traders lose money
Thanks! See you in subsequent articles.