Everyone is interested in making money
in the share market. They enter the share market with high expectations,
looking forward to make money with share trading. But in reality about 90
percent of the share trader often experience loss of money. Very small
percentage of trader manages to win and stay in the share market. In this
article we will be looking at. some prominent reasons why traders lose money in
the share market.
Greed and fear is the
number one cause that damages a share trader.
Lack of knowledge of the
share market and its functioning becomes the second most common reason.
Taking advantage of
exposure or margins provided by the share brokers,
without considering the market trends
Ignoring the news
related to the share markets, particularly individual share that is mostly under
scanner or widely discussed.
Ignoring the risk
management
Ignoring the money
management rules
All the above said causes are
interlinked to one another. Let us take the first cause. Most of the traders
who get affected are due to greed and fear. Traders who buy a share wait till
the share price begin to climb and sell
it to take some profits. When the same share keeps on making new high, the same
trader who sold it earlier tend to buy it and seek more profit. But this time
the trader gets into trouble. The share price that was on the run slows down
and begins to come down. The trader eventually sells the same share this time
losing some money. What could be the reason?
In this case the trader had little or no knowledge about the share that
he has traded. He had traded without any knowledge of the share s support and
resistance levels.
The fear factor which comes next is
another thing which takes away the capital of many traders. When a share is
bought the price of the share starts to declines. When it is sold the price
begins to climb high. This is a very common occurrence in share market with
which many day traders are familiar. Why should a trader gets exited and buys
or sells and still realize loss of money?
Most of the traders especially the day
traders take advantage of exposures or margins as popularly known, provided by
the share brokers. Share brokers usually allow 10 times exposure of the cash
deposited by the traders. ( in Forex market the margins allowed are several
times higher) The traders take these exposures as an advantage and take full
benefit out of this. The result is when there is a price rise, good profits may
come in but if the correction sets in, the trader loses a lot of money. Fearing
the erosion of the capital, the traders take quick decisions to close the
positions they hold. So here we understand the power of fear. Margins offered
by brokers can be utilized only with proper knowledge of the price movement of share
the trader is trading. If not it will only be beneficial to the share brokers
in the form of brokerage charges.
Lack of knowledge is one of the most
important factors which could be widely observed. In our day to day life we
meet many professionals. They have become professionals after proper education
in the fields they have chosen. Similarly the traders too must devote
considerable time and energy to study the share markets. There are some must
learn subjects like Dow Theory, Gann Theory and Elliot wave Theory. Knowledge
in one or more of these theories can maximize the winning percentage of trades.
Market news is something that a trader
should be always be aware of. Changes in policy decisions, news related to share
markets, and also international happenings can increase the volatility of share
market. To be on the right side of the market the trader should make it a point
to pay attention to all share market news.
Risk is a word associated with any
type of business. The share market too carries a great amount of risk. Risk management is a very special talent that
requires the full concentration of the trader. Proper risk management helps the
trader to cut loss early and preserve capital.
Another important factor is Money
Management. The trader should have a trading plan. He should not put all his
eggs in one basket. He should learn to diversify. There is a rule that requires
only 10 % of the capital be invested in one share . The trader is also required
to have some money as reserve. He should only deploy the surplus money set
aside for investing. No borrowed money should be used for trading. Trading with
very strict discipline can help a trader in the long run.
Can trading be a full time business?
There is no definite answer to this question. Trading can be profitable and a
full time business only for those who can mobilize large money and reserve
capital. For others it cannot be a full time business. There are good reasons
for this statement. The main reason is the share market has its own ups and
downs. The downtrends can last for months leaving little or no room for a small
time trader to make money. Therefore unless he has another source of income he
may face difficulties to manage his living.
Trading in share market can be
interesting if a person acquires the necessary qualities to be a share trader.
Trading can be highly rewarding if carried out in the way it is supposed to be
done.
