The primary reason why 95% of retail traders incur losses is due to the psychology behind trading. According to SEBI, 9 out of 10 people experience losses in options trading, and 7 out of 10 in intraday trading. One of the main reasons for this is psychological factors. As Warren Buffett famously said, “If you cannot control your emotions, you cannot control your money.” There are six major emotions that prevent us from making money. I will use an example to illustrate each of these emotions. Let’s delve into all six emotions in detail.
Fear: Fear is one of the primary reasons traders struggle to make money. For example, a trader buys a stock at ₹100 with a target price of ₹120 and a stop loss of ₹90. When the stock price reaches ₹105, the trader, fearing a potential loss, sells the stock prematurely. As a result, they only make ₹5 per share instead of the potential ₹20 per share. Meanwhile, they remain at risk of losing ₹10 per share, which disrupts the risk-to-reward ratio.
Greed: Greed sets in when the stock price hits ₹120. The trader, driven by greed, raises the target price to ₹130, hoping to make more profit. However, instead of reaching ₹130, the price drops back to ₹105. Now, fear strikes again, and the trader sells at ₹105, missing out on the ₹20 per share they could have secured with a solid, profitable trade.
Regret: Suppose the trader takes a profit at ₹120 and exits the trade, only to see the price rise to ₹150 afterward. This triggers regret, prompting the trader to re-enter the trade. Unfortunately, the price then drops back to ₹120, resulting in significant losses overall.
FOMO (Fear of Missing Out): Every day, there are shares in the market that rise by 20%, 5%, or 10%, depending on their upper circuit limit. The trader sees this as an opportunity to make more profits and eventually enters an overvalued stock, which ultimately leads to heavy losses.
Ego: After incurring losses, the trader becomes desperate to recover. They double their position size and start taking “revenge trades,” which is a recipe for disaster. This often results in even heavier losses.
Hope: The trader, now in significant losses, has lost nearly 30% of their capital in a single day. They begin hoping to recover their lost money as quickly as possible. To do so, they take the riskiest trades they can find, “hoping” for a recovery. But miracles don’t happen every day, and this behavior often leads to even greater losses. In this context, hope turns the trader into a gambler.
Remember, if you have a capital of ₹100,000 and lose 50% of it, reducing your capital to ₹50,000, you would need to earn a 100% profit just to get back to ₹100,000.
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