How People Lose Money In the Stock Market
People take years of diligent study and finally succeed in making money by trading in stocks, options, currencies or futures. Any seasoned trader can vouch that it is really possible to make money by investing in the stock market. But did you know that it is also a lot easier to lose a lot of money in trading. We look at some ways that can make you lose your money in the stock market.
People usually lose money when they begin trading without equipping oneself with the know-how of trading in the first place. They have not taken the time nor do they have the patience to learn the basics of it. Trading without a well thought-out, thoroughly researched, patiently tested and rule-based trading plan is the perfect formula to lose money in the stock market.
Reliance on news:
Many people rely on information about trading from unreliable sources such word-of-mouth advice from a friend etc. They also let emotions and hope take over reasoning and proper calculation and suffer losses. Some gullible investors fall prey to "can't lose" tips, message boards and "hot stocks" announcements, junk email picks; these are all information that does not carry any real value.
Not using risk capital:
Overcome by emotion and some initial success, many people invest money that they cannot afford to lose. Such funds may be meant to meet essential requirements, such as a house mortgage, medical expenses or children's school tuition fees. A knowledgeable trader always invests with his risk capital, or the money he can afford to lose.
Reliance of technical indicators:
Some people wrongly hold the view that technical indicators are all magical and will show them the way to make huge gains in trade. However, they do not understand that technical indicators simply provide information and cannot predict the future like crystal balls.
Many investors make trading an overcomplicated affair instead of keeping it simple. They pick and choose any strategy they come across and then shift again to another one they find. They ignore the basics of money management by not limiting trade size or using the 'stop loss' option.