Out of curiosity I searched for the phrase 'Why am i losing money in the stock market', google returns 38 Million results.
It is incredibly difficult to make money as a retail trader. Most people lose money through behavioural traits, greed (taking on excessive risk) and fear (selling instead of buying at the bottom). Psychology aside there is one constant factor that stacks the odds against every single trade. Its not a wall street conspiracy or high frequency traders or any of the other parties often accused of market manipulation.
Its fees, to open a position the trader pays a fee, to close the same position the trader pays another fee. These two fees are effectively a guaranteed lose on every trade. Whenever a trade closes in the money, part of the paper profit is consumed in paying the trade fees. Whenever a trade closes at a lose, the fees still have to be paid adding to the lose.
Stepping back you can see that a retail traders returns are weighted to the downside, fees reduce profits and increase loses.
|Trade||Paper Profit/Loss||Profit/Loss after fees|
Two trades, one that's in the money and one that closes at a loss, on paper they balance each other out leaving the trader with all of the original capital. In reality this sequence of two trades generates a loss of capital of 140 USD.
To fully appreciate the challenge faced by retail traders lets look at an example over a longer period of trading.
A.Trader uses initial capital of 10,000 USD to trade once or twice each week. As a trade requires a buy order to open the position and a sell order to close the position, we can say that the trader places on average 3 orders per week.
If we consider a single trade for 10,000 USD, to open and close the trade our trader pays 70 USD or 0.7 percent. This is an instant guaranteed loss as soon as the position is opened.
Returning to the example of A.Trader, with three orders per week, this trader must generate 105 USD in profit every single week just to cover costs.
That might not appear too bad, but lets look at the impact across 52 weeks, 105 * 52 = 5460.
A.Trader has to be confident of making an annual profit of 54% just to cover costs. That is incredibly difficult, look at any of the investments you have ever made, none of them, not a single one will have returned 54% year after year after year.
If A.Trader makes as many winning as losing trades, at the end of one year of trading A.Trader will have reduced initial capital of 10,000 to 4,640 a loss of over 50%.
There are many other effects at work which contribute to make the odds even worse - bid/ask spread, compounded losses, time decay, margin interest, lose of capital, I will cover these in a future post relating to warrants.
Still think its easy ?