Why people lose money in a falling market?
Hello guys. I hope you are doing good. Nowadays the market is highly volatile. The market is complete in a grip of the bear. We all know that trend is down but still, most of the retail traders are losing money. I’m getting so many queries nowadays and after getting these queries I wanted to share my experiance about why people lose money in a falling market?
I was in a discussion with one of our fellow trader and he is sharing some of his thoughts with me. The same feelings I got from so many traders. All are saying one thing, “We know that market is down but still we are losing money.”
We are loosing not because we are holding some stocks in cash and now as the market is going down, our position is showing some loss for us.
Even if we are taking fresh bets in the market for intraday prospectives in cash, futures or options. Still, we lose money in this falling market.
After listening to all of them I found some interesting things, people are doing in this market. I know these are some basic mistakes most of the retails traders are doing in their initial days. Even I too did these same mistakes.
That’s why I’m writing this post to share my experience with you. If it can help you, it will be a great feeling for me. Please read this post and share your thoughts in the comment box.
Now lets come to our question:
Why people lose money?
People are losing even they already know the market is falling and the trend is down. Before going deep in this question, let me share something first.
In stock trading, most people are running behind a good strategy, tracking different data points and working hard to make their trading profitable. But we are missing one most important thing which we need to work even before entre in this market.
Have you any idea what it is?
This is Trading psychology. Yes, it’s your trading psychology which will make you a successful trader. If you are working only on trading psychology, Even a simple strategy can make money for you.
This is the thing, where most of the trader are struggling. They know the trend but their psychology towards the market is playing a major role to make a decision about their trades.
To understand this let me share you a chart.
It’s the bank nifty chart. You can see the trend is complete downtrend. Now my question to you is, “what will you do at these points when you saw that bank nifty is taking support?”
With every fall where we need to look for a sell-on-rise opportunity, people are doing just the opposite. With every fall they start to convince them that now the market has formed a bottom and from here it will go up and took long positions in a hope that they will make good money.
But what the market is doing? It is just eating all the stop-loss and continues its downward journey. Still, they start looking at the previous support levels and try to convince them that this time it will take support here and bounce back. That’s why people lose money repeatedly.
You know there is a very old proverb for share market which is still valid
Always trade with the trend
But what we are doing? we are trying to catch a falling knife. We are taking a trade whose probability of a stop-loss hit is high.
See everything depends upon the probability. What do you think? We shouldn’t take that trade which has a high probability to make money?
Are we working for stop-loss? Are we taking a stop-loss which has a high probability to hit and saying that it’s a good risk: reward ratio?
See these are the mistake most of the traders are doing. We only want to see Nifty or bank nifty to go higher, it’s difficult to accept for us that now it’s falling and we should look for an opportunity to sell-on-rise.
Let’s understand this with an example
If today We found that Nifty broke the strong support of 10800 and now trading at 10725 or can say taking some support here. What we’ll do? we will just take a long trade in nifty or buy a Call option and expect that nifty will bounce back from here and hit 10800 again and hope we will make money.
Now my question is: If we know that the overall trend is down, Nifty has broken a good support lets say 10800, trading at 10725 and it can hit 10800 again. So Instead of just jump in a long trade, We should not wait until nifty reverse and hit 10800 again?
At 10800 we can initiate a Short trade with the same stop-loss we were keeping in that long trade. This trade will be in the trend and high probability to go down as the overall trend is also down. The probability of a stop-loss hit is also low.
Let me share you one more chart here:
Now, look at this. Banknifty came down, goes slightly Up and again made a new low. Now, What most of the traders are doing?
When banknifty took support around 26775, People starts taking a long trade in a hope that bank nifty has formed a bottom and now it will bounce back.
You can see yourself what the Bank Nifty did. This is what I want to tell, We should not just jump in a trade, we should wait for a recovery and then we should initiate a short trade.
That risk will be more logical and valid to take. See This is the market, it always trade in a zig-zag form. It never goes in a straight line. So if the trend is down, we should wait for a bounce-back and look for a selling opportunity only.
This is the mistake most of the retail traders are doing. and that’s why people lose money in a falling market.
Final Words on Why people lose money:
I hope now you can understand, what should be our approach towards the market. Just keep it simple. “When the trend is UP, always look for Buy-on-dips and when the trend is Down, Always look for Sell-on-Rise opportunity.”
I’m recommending some of the books which will help to understand the trading psychology:
- The New Trading for a Living: by Alexander Elders
- Come Into My Trading Room: A Complete Guide to Trading: By Alexander Elders
These two books helped me a lot to understand market behaviour. I hope this post will provide you with some extra value. Please don’t forget to share you feedback or suggestions in the comment box. It will encourage me to write some more valuable content in the future.
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