Friday, January 21, 2011

Common reasons why retail investors are losing money

For most investors, irrespective of whether they are fundamentalists or technicians, a common reason for losing in their trades or having their funds tied up in long term investment is the mistake they make at the point of entry and in smaller number of cases when losses are made due to refusal to exit. Fundamentalists do not know the timing of entry and exit, and technicians who are not good in interpreting charts will get the wrong timing on entry and exit. Both are affected by the psychological factors.

The root causes are the two psychological or emotional factors - (1) impatience and    (2) "kiasu" - refusal to take lesser profits or incur small losses when there is an exit signal after a small pullback.

I am talking from my own experience of my past mistakes as a fundamentalist, and what I have read from what technicians talked about. Now I have corrected my mistakes, and allow the chart to tell me when to enter and exit, and it worked well for me, and should work well too for anyone technician who can interpret a chart well.

Impatience in buying a stock is the result of listening to too many other traders making money, or hearing good news , reading good reports, or even as a result of own fundamental analysis. Haven't you done this before - like rushing in to buy a stock on tips? Or when your stock went up to a price and you did not sell, but it declined and even turning profits into a loss or long term hold, just because you refused to accept a possibility that the stock will continue to go down to sell even with a smaller profit?  This is an indication of  "kiasu" behaviour.   Sometimes losing may not be due to the quality of stock, but losing in a trade is about the wrong timing of entry and exit.  Perhaps this short article may help when you are not clear of entry and exit:

So if you have any of those behaviour, know your mistakes, learn to accept your mistakes and correct them.

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