Statistics show that, on average, 95% of retail traders lose money in the stock market. This means that less than 1 out of every 10 traders are profitable! For those who are new to the market, this can be incredibly discouraging. What’s even more surprising is that many of these individuals who lose money tend to make the same mistakes, and I have to admit, I made these mistakes too when I was just starting out.
Over the past few years, I’ve had conversations with numerous traders and investors, and they all seem to share a similar story about why their trading accounts eventually took a hit. I decided to document these discussions and identify the top five mistakes that led to their losses.
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1. Treating Trading as a Pastime
A common mistake is not taking trading seriously during the first year. Many individuals enter the market just for the thrill of it, experiencing the rush of anxiety and excitement as stock prices change every second. Initially, whether they make a profit or incur losses doesn’t matter to them. However, they soon realize that they’ve wiped out their entire capital. It becomes more like gambling to them.
2. Relying on Gut Feeling
Another dangerous habit that causes people to lose money is relying on gut feelings. You often hear people confidently claim that a particular stock has hit its bottom and will start moving upward. People tend to make such assumptions without any logical basis. When the same stock drops by another 10-20%, these individuals bid farewell to the markets. Trusting gut feelings should be avoided in the stock market.
3. Excessive Margin Trading
Margin trading was introduced to assist retail traders with limited capital. Unfortunately, many traders misuse this tool. They engage in excessive trading, leveraging their capital up to 10 times. While small profits make them happy, a significant loss can wipe out their entire trading capital. You can learn how to use margin trading effectively in our article here.
4. Neglecting Stop Loss
Stop Loss is the price at which your positions are automatically closed to limit your losses. Beginners often avoid using stop-loss orders, hoping that their positions will eventually break even or turn profitable. However, losses tend to accumulate, and these traders later regret not using stop-loss orders. Novice traders commonly limit their profits while allowing their losses to escalate.
5. Unprotected Options Trading
While options were originally introduced as a hedging instrument, many traders engage in unprotected or “naked” options trading. The internet is filled with stories of people who claim to have multiplied their money through options trading. Inexperienced traders believe in these one-time success stories and try their luck with options without realizing that options are one of the most complex trading instruments, requiring years of practice to master.