When it comes to trading in stocks, two out of every three people lose money. There are very few people who actually benefit and take profit by trading in the stock market.
You must have heard people saying that when they buy, the market goes down and when they sell, the market goes up. This is a common phenomenon amongst retail traders, thus they often end up making losses and forming a negative opinion about the stock market.
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There can be a number of reasons why people lose money while trading in the stock market. Let’s discuss some important reasons one by one.
1. Putting all eggs in the same basket :
This is a common mistake which people come across while trading in the stock market. They put all their money in just one or few stocks. Diversifying your portfolio is very important in order to manage your risk.
Also, remember that do not over-diversify your portfolio, otherwise you may land up minimizing profits and maximizing losses instead of doing the opposite.
2. Not having a proper system :
By system, we mean that there should be a proper basis and not just a bias on which you take your trade. Most traders make this mistake of not having a proper system and setup. Before entering into a stock, you should know when to enter and exit a stock, your stop loss, and your targets.
Most traders who make money in the stock market have a proper system and they strictly abide by their system. It’s not that they don’t lose money but a proper money management skill helps them in limiting their losses.
3. Herd Mentality :
Most people who trade in the stock market often listen to external noise in the form of news, media, analyst calls etc. and trade the stock without doing further research or seeing past historical data. This behavior is very common amongst a large section of retail traders.
To be successful in the stock market, the trader should do proper research, build a proper strategy, work out on the money management and then take decisions wisely instead of blindly following them.
“Follow the money. Don’t pay attention to what people say, pay attention to what they do.” –Jerry Robinson
4. Lack of Patience :
“Patience is the key to success.” This quote holds true in the stock market. You make money in the market when you spot a right opportunity and trade the same by maintaining proper risk-reward without being panic due to short-term volatility.
So, don’t be in a hurry to enter a trade. Know what your niche is, have patience, and look for the right setup, money will automatically follow you.
5. Lack of knowledge :
People enter stock market with a mentality to earn easy money but what they don’t realize is that it requires a lot of research, study, and dedication to become successful in trading as they are competing against the best minds.
A lot of traders have burnt their fingers because they lack even the basic understanding about the stock market. It is always advisable to have knowledge of the subject especially in which your hard earned money is invested.
Bottom Line :
A common mistake which most amateur traders often commit is the lack of appropriate money management skill. It is commonly seen that they take a trade without keeping a proper stop loss which is against the trading rules. Discipline and patience are the two golden rules for any successful traders.
The main motive of anyone in the stock market is to make money, either by hook or by crook. For anyone who is trading or investing, or for that matter is going to enter the stock market, he/she should definitely calculate his/her risk-reward ratio.
Keeping everything mentioned above in mind, trade well, trade wise.
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