Why 80% of investors lose money in the stock market
Yes, you read that correctly. More than 80% of traders and investors lose money in the stock market. These are the so-called retail investors. The amateurs like you and me.
In this article, I answer the question of why this is the case and I give simple solutions so that this does not happen to you.
Most important advice for newbie investors
Don’t try to beat the market. The market is not something you should try to beat or oppose. That’s just not going to work. The market is something you have to learn to understand and you have to learn to surf the movements of the prices.
The market doesn’t care what you think will happen. It is also not about whether you as an investor are right. It’s about making a profit in the long run.
Start with too little money and bet too high
I estimate that a lot of traders and investors are starting this game with the hope of making money quickly. That is understandable, because if you look at the marketing campaigns of brokers, in the past there was a lot of hammer action on the high leverages and the possibility of making large profits with small amounts.
Nowadays that is a lot less because of the stricter regulations in place, but I suspect that many novice traders are still starting with the wrong hope.
Trading and investing is not a game that will make you rich quick. It takes time and energy to become a good, but above all, smart trader.
Making emotions and mistakes
The risk of starting with a small initial capital and still opening large positions is that with a few losing trades you can lose your money. In addition, you are probably too emotional because you have too much money in it, which will lead to mistakes.
Solution:
This may sound a bit contradictory, but as a novice investor, you should really consider starting with a higher starting capital. The higher your starting capital, the more trades you can make.
Especially as a beginner you will not have a very high win rate and therefore more losing trades. This is okay, as long as you use a healthy risk to reward ratio. But that is why it is important that you can absorb those losing trades.
You also have to keep your trade size small. Opening small positions not only reduces emotions when trading, but you also minimize the risk of big losses.
Disclaimer: This is not investment advice. CFD trading is risky. You can lose all your money
Poor or no risk management at all
Another reason investors lose money in the stock market is that they fail to apply proper risk management. This is really deadly.
Your first task as a novice trader is to survive. You can be a very good trader and still lose all your money due to bad risk management.
Golden rule: First learn to protect your capital and only then try to make a profit.
The smaller the amount in your account, the smaller the chance of success.
Solution:
ALWAYS use a stop loss and dare to move it if your trade is in the plus. Choose a fixed percentage that you are willing to risk per trade. For example 5 or 10% of your capital.
Only take trades where you can take an average risk to reward ratio of 1: 2. That way you can lose 60% of your trades and still make a profit!
Greed
Some traders and investors want to squeeze everything out of a trade. They don’t want to leave money on the table. As a result, they let trades go on for too long and eventually lose because the price changes direction.
Solution:
Very simple: don’t be greedy. Be happy with the profit you take. Sure the price can move after you make a profit, but please don’t look at that.
There are new opportunities in the market every day. Never look at what you could have taken extra on a trade if you had left it open. There is no point.
To much doubt
Another major reason why traders and investors are losing is that they are impatient with doubts. This doubting happens especially when they open trades that do not immediately move in the right direction and make a profit.
Then they close their position and 9 out of 10 times the price turns again and they still had made a profit. This is of course killing your self-confidence and it also makes you restless.
Solution:
Stick to your trading plan and your strategy. Take your trade and stay away from it. By doubting and switching all the time, you only ensure that you always take small amounts of your capital.
Wanting to be right
I already mentioned it in my opening, but trading and investing is not about being right or being right. Nobody is interested in that and the market is certainly not interested.
Losing trades are simply part of trading. You shouldn’t be emotional about that. Ultimately, it is about making more profit from your winners than you lose from your losers. You can read more about this in my other article: Losing is part of trading.
Solution:
With losing trades, check whether they met all the conditions of your strategy. If so, just say fuck it to yourself and move on to the next trade. If not, write down the mistake you made and learn from it for the next.
Buying strategies and systems that promise golden mountains
If it is too good to be true, it is. There is so much garbage for sale. Systems that promise you will become a millionaire within a year or are 100% accurate should be completely ignored.
With this kind of junk, no attention is paid to risk management, so you will probably lose your hard-earned money in the foreseeable future.
Often these systems and strategies are also sold by newbies, who cannot even trade profitably themselves.
Yes, there are certainly good trading courses out there, but they will never promise you this kind of nonsense.
Solution:
Use your common sense and try it yourself first with all the free information that can be found. As soon as you come across a strategy that appeals to you, you can always check if there are well-known traders who offer more (paid) information about this in a normal way.
Moral of this story
80% of kitchen table investors (new word!) Lose money in the stock market and that is because:
- Unnecessary trying to beat the market
- Too low starting capital + too big trades
- Starting with the wrong reason and expectations
- Bad risk management
- Greed
- Doubt
- Wanting to be right
- Buying nonsense systems and strategies
I especially want to emphasize trading with a good risk to reward ratio. This was the deciding factor for me at the time, which ultimately led to me making a structural profit.
If you’re interested in trading and investing visit my blog about trading for more information and interesting reads.