Why retail traders lose money?

Apurva Sheth
I have heard many people say this over and over again that "Most retail traders lose money, traders are doomed to lose money sooner or later".

Most often retail traders simply give up the idea of trading after suffering a string of losses. They hardly sit-up and take note of the reason for their failures and simply agree with the statement without even giving a second thought to it. They would hardly raise questions like.

Why did I lose money?

What mistakes did I do?

How can I avoid doing the same mistakes again?

What lessons did I learn from these mistakes?

Asking such questions will help us progress. I strongly believe that the only real mistake is the one from which we don't learn anything.

Let me speak to you today about a mistake that a common investor does.

When asked, "What is the percentage gains required to recover from a loss of 50%?"

The reply comes faster than the speed of light, "50%".

The poor retail trader forgets very simple and basic mathematics that he had learned at school.

"A stock that declines 50% must increase 100% to break even", he is shocked to hear this.

Just think about it with an example. A stock that drops 50% from Rs.100 to Rs.50 (50/100 = 50%) must rise by Rs.50, or 100% (50/50 = 100%), just to breakeven and exit at the original cost of Rs.100. Many traders falsely believe that if a stock drops by X% it will simply have to rise by that same X% to break even. We know that this isn't the case. Just have a look at this table below.

Percentage Loss  Percent Rise To Breakeven 
10 11%
15 18%
20 25%
25 33%
30 43%
35 54%
40 67%
45 82%
50 100%
Source: Profit Hunter

The picture becomes even ugly when you extend the percentage loss further.

Percentage Loss Percent Rise To Breakeven
55 122%
60 150%
65 186%
70 233%
75 300%
80 400%
85 567%
90 900%
95 1,900%
100 DOOMED
Source: Profit Hunter

We know how difficult it is to find a stock that delivers 100% returns. And it will be even more difficult for a stock to recover 100% after it has fallen by 50%. Despite knowing this many traders still stick to their loss making positions in the hope of a recovery. Eventually they lose more than they could afford and never come back to the trading arena.

However, we don't want this to happen with you. Here, at Daily Profit Hunter our aim is to give you a trading edge. Our aim is to level the playing field between the retail and institutional traders by providing the retail trader with the same edge that an institutional trader is equipped with. We would like to provide unbiased and independent research that not only delivers you solid returns but also expands your thought process.

One such thought provoking event that we have lined up for you this weekend is the Annual Equitymaster Conference to be held on Saturday, 31st January 2015. This year's theme is "A Tale of Two Indias: Building Wealth in the New India." As part of the conference program, Asad Dossani and I, your Daily Profit Hunter editors, will be speaking to you. We will share our views on trading, technical analysis, algorithms and anything else you would like to know from us.

At the conference we will not only speak about the ways in which you can safeguard yourself from the common pitfalls (like the one I showed you above) that retail traders are normally trapped into but also give you insights into the new wealth building opportunities that are coming up.

Trading is one such opportunity which you all are familiar with. However, there are many other opportunities that you will come across in this conference. The best of the best brains from the industry will be presenting their ideas on building wealth in a new India. To name a few Mark Ford, who is a global wealth coach and self-made multimillionaire and Ajit Dayal, who has a rich global equity asset management experience will be amongst a few speakers who will be exclusively speaking to you at the conference.

If you haven't signed up for the conference, I highly encourage you to do so. I can assure you that this will be an interaction you will not forget for the next few years to come.

Hope to see you on Saturday.

Why retail traders lose money? Share your views in the Club or share your comments here.

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1 Responses to "Why retail traders lose money?"
pinakin
29 Jan, 2015
Your intentions are good but your fees of 10K for the conference is too high for a small/retail investor. U could have chosen a more modest venue & charged moderately instead of the 5-star venue with 7-star fees!Like 
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