7 Common Trading Errors | Why Intraday Traders lose Money | Motilal Oswal
7 Common Trading Errors | Why Intraday Traders lose Money | Motilal Oswal

7 reasons why intraday traders often lose money in stock markets

Intraday trading is quite obviously a high risk game. Unlike what a lot of people believe, intraday trading is not about the right ideas and the right trades. It is a lot more about how you manage your risks and stick to your trading discipline. Simple mistakes that intraday traders commit include; averaging your positions, trying to outsmart the market, overtrading to recover losses, focusing too much on hot tips etc have created many Indian stock market loss stories. Interestingly, 90% of the intraday traders are losing money in intraday trading. Here are 7 principal reasons why intraday traders lose money in trading.

 

Putting too much at stake in a few trades

One of the basic rules of intraday trading is to calibrate your risk exposure and the maximum loss that you are willing to take. You need to define the maximum loss you are willing to take in a single trade, in a day and on your capital overall. When you stake too much of your capital, time and energy on just a handful of trades, there is the real risk of negative events wiping out a substantial portion of your capital. The best way is to add on to your risks gradually and as you get profitable, keep relying on staying net positive in terms of your trading risks.

 

Not understanding the trade structure well enough

What do we understand by trade structure? The success of the trade depends on a variety of factors. You need to understand the history of the stock, its price trajectory, news and corporate announcements and the supports and resistances of the stock. When all these things are put together, you get the structure of the stock. The reason you need to limit yourself to a handful of stocks for intraday trading is that you need a thorough understanding of the structure of the trade.

 

Going by tips rather than learning to self-trade

It is quite simple to get a relentless flow of tips on trading but very hard to make money on these tips. The best way to succeed in intraday trading is by learning to self-trade. It is impossible to make money by listening to tips and titbits from WhatsApp. You need to work on charts, understand structures and learn to put your own trades independently. Most intraday traders do not want to take this effort and that is why they underperform.

 

Failing to maintain discipline of stop losses and profit targets

Like it or not, discipline lies at the core of intraday trading success. Trading is less about returns and more about managing risk. This is all the more true with reference to intraday trading. You cannot enter an intraday position without a pre-defined stop loss and profit target. Ensure that the risk-return is favourable to you in the long run. But above all, trading is all about discipline. From the way you place an order to the way you economise on costs to the setting of stop losses and profits targets; the entire intraday trading game is all about discipline. In fact, this is where most of the intraday traders falter!

 

Not taking a 360 degree view of the market

It is quite normal to imagine that an intraday trader needs to just catch the trend and ride the wave. It is not as simple as that. Just as a fundamental investor needs to go into the depth of the stock performance, the intraday trader needs to get into the nuances of the structure of the trade. As mentioned earlier, the trade structure is a mix of fundamentals, news flows, corporate actions, charts, supports, resistances, breakouts etc. As an intraday trader you need to take a 360 degree view of all these factors. Contrary to popular perception, the intraday trader requires a lot of depth in approach.

 

Ignoring the trading plan and the trading diary

These are two very important things that most intraday traders tend to ignore. Let us look at the trading plan first. The trading plan captures the broad outlines of how the intraday trades need to be conceived and executed. This includes how to put stop loss, profit targets, what factors to consider, how to select the right trading hours, maximum acceptable loss etc. In fact, the trading plan is the constitution for your trading activity and you need to adhere to it strictly. The trading diary is a record of your trades during the day along with the justification and the EOD analysis of performance. The trading diary is intended to help you identify weak areas and plug the gaps in your trading strategy. If you don’t accord due importance to the trading plan and the trading diary, then your success as an intraday trader could be difficult.

 

Focusing on being right rather than on making money
There is a subtle difference being right and being in the money. Let us start with a rhetorical question. What is the difference between an analyst who predicted the Nifty direction 9 out of 10 times right as against another analyst who predicted only 6 out of 10 times right? The answer is that there is no difference because both did not make money on the trade. The focus of the intraday trader must be on making money on the trade and not whether the bottom and top of the market was caught. The intraday trader needs to be crystal clear that the core focus is to make money. Period!
 

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