InvestorQ : Why do traders so often lose money in the market?
Rutuja Nigam made post

Why do traders so often lose money in the market?

Rashi Mehra answered.
3 years ago

What most traders tend to forget is that all traders operate with finite capital. The quantum may differ. George Soros may have access to much larger capital sources. But the fact remains that he also trades with finite capital and hence needs to manage his risks. The real reason why timing is so difficult and practically unworkable is that you actually trade with finite capital. As a result you need to always trade with stop losses and profit targets. They help you to protect your capital risk and also to constantly churn your capital. One of the basic rules of trading is not to get stuck in positions for too long as it implies locking up of capital.

Secondly, you cannot endanger your base capital beyond a point. So if you have bought a share at Rs.50 and it goes to Rs.40, you just cannot keep buying more of it even if you are certain that it is the bottom. There is only so much capital that you can afford to allocate towards a trade. Last, but not the least, there is a major concentration trade risk that you run by trying to time the market too hard. There are two ways this could happen. You could either average closer to the lows or wait for too long to book profits at the highs. In both the cases you are taking a risk that could expose your trading portfolio to the vagaries of a set of specific factors. That is not good trading strategy! Good trading strategy is all about knowing your odds and playing it smartly. As Peter Lynch rightly said, “Traders lose more money trying to anticipate and prepare for corrections than in the actual market correction itself”.