I have to write this. During this recent bull-run, some of my friends lose quite a substantial amount of their trading capital by shorting the index futures. Instead of cutting their losses quickly, they compound to their mistakes by adding short positions as the index futures traded higher each day. In this post, I would like to bring out 5 sure ways to lose your money in the stock market, commodities market, or forex. You will be surprised that many of the index futures traders out there are practicing these and therefore on their ways to financial ruins. Don’t do this as it will hurt your pocket and causes you to lose your precious trading capital. Apart from sharing with you on these few key points on stock trading wisdom, I will also share with you on the traders’ psychology and why they kept making these mistakes and were not able to rescue themselves out of this financial mess.
5 Sure Ways to Lose your Trading Capital in the Stock Market
- Let us go against the stock market trend.
- Take your profits quickly and let your losses run.
- Averaging down when we are in losses.
- Let us bet heavily and trade often so that we can double up our money quickly.
- When the stock market went against us, let us hope that it will turn, of which we are sure that it will happen tomorrow.
Going against the stock market trend is the quickest way to suck-dry your trading capital. It is like a black hole that quickly drains your money away and potentially causing many traders to bankrupt financially. Why people go against the market trend? It is a psychological reason rather than a rational one. Since stock market had bottomed and rallied to new high, traders that missed riding the trend would felt left out. Having no position in hand, they would like to jump into action but the high prices of stocks or index futures kept them hesitating. They are afraid to buy stocks or long index futures. Therefore, they wait to short the market. They would attempt to pick the market tops which is hard to do. Unfortunately for them is that the market trends higher and higher until their losses are huge. Another reason for this behavior of going against the market trends is that traders have the tendency to want to optimize their entry and exit points. They want to short at the highest and long at the lowest level. Picking market tops and bottoms are tough and dangerous especially for novice traders.
Novice stock traders especially those that speculate on the index futures would normally make the mistakes of taking profits quickly. They often quote "You will never go bankrupt by taking profits." Well, it is true that no one will go bankrupt by taking profits but there are some hidden mechanisms in the stock markets that will cause many traders including professional investors and speculators to lose money in the long run. Making money and losing money is part and parcel of this speculation business. If we don’t have enough profits to cover our streak of losing trades, we could either be discouraged and trade recklessly, or run into negative cash flows. One of the reasons of taking profits quickly is that novice speculators are afraid that their profits would vaporize and therefore they would like to lock-in and cash out their winning position. On the other hand, they would allow their losses to run into big amount is because they refuse to take losses and admit that they are wrong in the first place. Trading in stock market is a very serious business. Refusing to admit that we are wrong in our market call or thinking that paper losses aren’t real are delusions that traders create in their own minds. Many stock market pundits refused to trade responsibly by taking losses even though the losses are huge. They are afraid to walk away from bad trades. Professional stock market investors or speculators would walk and stay away from trading when they know that the risks-rewards ratio does not justify. Trust me; I have seen many of these cases. Their emotional behaviors are exactly as described above.
Averaging down is liken unto doubling your bet when losing money in casino. Novice traders think that when they are averaging down when the stock market is trending against them, their lower costs of equity purchases would turn their losses into profits whenever the stock market reverses its trend. This sounds good but quite unknowingly to many novice traders and investors, this piece of investment advice is the one that causes them to bankrupt totally. There are two main reasons why this averaging down to increase your position size when you are in losses doesn’t work. Firstly, when the financial market trend moves, it moves for quite a while. You will never know how much and how long will the trend goes. It can always exhaust your trading capital before the trend reverses its course. The second reason is that when you are having losses in your portfolio, it is most likely means that you are wrong in the first place. Adding good money into bad trades could not save the dying horse. They always said to themselves that the market will sure to reverse. Yes, it is true that eventually the market will reverse but by the time it does so, you probably are out of this speculation business. Again, the psychological reasons for traders or investors to make this mistake are due to the underestimation of the power of financial market trends and the needs for human to optimize trading results by trying to pick the market tops and calling the market bottoms.
Greed is one of the driving forces that draw the general public into this lucrative business in stock market investments and speculations. Whether it is equity market, futures market, commodities, forex, or options market, you are trading because of the desires for profits. Making money is your ultimate objective. It is also this greed factor that causes many traders including professional traders to invest heavily beyond their acceptable risks tolerance. Their overconfidence is the reason for their overexposure to market risks. They buy heavily beyond their financial capacity. Some of them borrow expensive (high interest rates loan) and huge amount of money to trade in the stock markets. They further increase their leverage by using margin accounts. I am not saying margin accounts are bad ideas. They are useful in the hands of professional investors and speculators. But in the hand of novice traders, it will be financial disasters. The other problem is that they trade very often. They trade in and out of the markets. Their commission itself could be more than what an average income-earner makes in a month. This leads to below than average trading results and profitability. The mental motivation for this behavior is due to the mindsets that think that they have to do something to make money in the stock markets. This is far from the truth. In fact, most money made in stock market is actually doing nothing but to sit idle on the profitable positions and staying away from unpredictable market trends. This is due to most people comes from the background that says we must work to make money. Unfortunately, this works the opposite way in the stock market.
Hope is the reason that we are alive in this world. But false hope is the one that kills traders and investors. By refusing to admit that the market trend has moves against them, they wait and hope that tomorrow will be a better day. Some of them are lucky and get out of the situation with profits. But many are trapped inside and deeper as the market trends further against them. I have personally gone thru this state and still seeing many of my friends are caught within this emotional bondage. True and professional stock traders and investors don’t hope. They calculate the risks, determine their position size, and execute the trade with proper entry and exit levels as well as setting stop losses and trailing stops immediately when entering the trade orders. They based their judgment of the financial markets outlook using tools like fundamental analysis, technical analysis or other market timing tools. They are rational and exit when the reasons for their initial capital commitment are no longer there. They sell their equity position when the market trends reverse or the company’s fundamental does not look promising as before.
I hope I have made this post clear and hope that my friends take the time to read and digest this blog post. Don’t worry about your present losses but focus into turning yourself into a professional investors or speculators with proper mindset and emotional control. In due time, you will make money from the stock market. Oh, by the way, I am not writing this post to teach you how to lose money but rather showing you the mistakes that traders made and how you can avoid making the same mistakes.