Michael_Wang_Official
Education

Why Beginners Lose Money Even in an Uptrend

SPCFD:SPX   S&P 500 Index
If you like this analysis, please make sure to like the post!
I would also appreciate it if you could leave a comment below with some original insight.


In this post, i'll be focusing on the psychology aspect of trading and investing that most people overlook.
Contrary to common belief, in my personal opinion, understanding a trader and investor's own psychology is significantly more important than educating oneself on trading techniques and learning how to read financials.

'Buy low sell high' is the motto. As simple as it sounds, why do most people lose money trading or investing?

There are four major mistakes that most beginners make:
1. Excessive Confidence
This stems from the idea that people think of themselves as special. They think they can 'crack the code' in the stock market that 99.9% of people fail to, and eventually make a living trading and investing. However, taking into consideration the fact that more people lose money in the market, this form of wishful thinking is the same mentality as going into a casino feeling lucky. You may actually get lucky and win big the first few times, but in the end, the house always wins.

2. Distorted Judgements
While simplicity is key, the approach most beginners make in trading and investing are too simplistic, to the extend where it's hard to even call it a trading logic or reason to invest. They spot a few reoccurring patterns within the market, and this is almost as if they discovered fire. It doesn't take long to realize that the "pattern" they spotted was never based on any solid reasoning, or worse, wasn't even a pattern at all in the first place.

3. Herding Behavior
The fundamentals of this is also deeply rooted in a gambling mindset. Beginners are attracted to the idea of a single trade or investment that will make them a millionaire. However, they fail to realize that there is no such thing. Trading and investing is nothing like winning the lottery. It's about making consistent profits that compound throughout time. While people should definitely look for assets that have high liquidity and some volatility , the get-rich-quick mentality drags irrational beginners into overextended/overbought stocks that eventually drop drastically.

4. Risk Aversion
Risk aversion is a psychological trait embedded within all of mankind's DNA. Winning is fun, but we can't tolerate losing. We tend to avoid risk, even when the potential reward is worth pursuing. As such, many beginners take extremely small amounts of profits, in fear that they might close their position at a loss, trading with a terrible risk reward ratio. In the long run, their willingness to not take any risks leads to losses.

Depending on the price action, they also go through seven phases of psychological stages:
- Anxiety
- Interest
- Confidence
- Greed
- Doubt
- Concern
- Regret

As we can see in the chart for the S&P500 (SPX) , there are price points at which beginners would buy during their 'confidence' phase, and sell during their 'concern' phase.
As a result, they would be losing money even when the market moves in an upward trend.

Even when the market is at a clear uptrend, it goes through phases of impulse moves, and corrective moves.
However, as beginners are swayed away by their emotions, they fail to recognize the overall trend, resulting in them buying high and selling low.

Conclusion
The most important thing that beginners need to realize before they start trading or investing is that human beings are emotional beings, and as a result, they are not different from the rest of the people in the market. All successful traders and investors throughout history have had superb meta-cognition. They understand their own psychology, as well as that of other participants in the market, allowing them to make rational decisions with patience, rather than hasty decisions based on emotions.

Comments

I think one of the most interesting concepts regarding trading pyschology is the principle of reflexivity or market feedback loops. So this goes against our core emotional reactions to price fluctuations, because at any given moment when everybody is over optimistic (or pessimistic) about price action is that markets tend to move in the opposite direction. And so we have to detach ourselves from market price action and observe it as if a non participanting outside observer, which is obviously way more difficult when our money on the line, and we're obviously taking part in it.
+12 Reply
@idz, Well said. People tend to get emotional with skin in the game, and one of the ways to start off as beginners is to start with a small amount of fund that doesn't sway their emotions too much. Thanks for commenting :)
+3 Reply
jamesjackcostello Michael_Wang_Official
@Michael_Wang_Official, This could not have been said better. My trading changed completely the more skin I had in the game. Opposed to when I was trading smaller amounts of funds. I did much better when I first started trading with 2000 dollars than I did when I was trading with 50,000 dollars. I was no longer trading with my brain but with my emotions. 5%-10% down is not so bad when its 2000 dollars, however when its 50,000 dollars the LOSS APPEARS to be GREATER triggering emotion. Even though these same 5% swings are the same stocks they APPEARED much greater. Triggering my emotions and irrational thinking to sway my judgement and try cut losses opposed to letting my trades play out. Which in my case would have been gains, but losing is sometimes the best way to learn as long as I can understand the loss and not make the same mistakes.
+8 Reply
Intratekram jamesjackcostello
@jamesjackcostello,

I, fortunately, have not had the problem of loss aversion keeping me from confidently trading large amounts into huge drawdowns, over and over for several years. I've continued losing money in cryptocurrencies at a very reliable rate. lol

I can say that happily now though, because I have recently seemed to turn the corner and am starting to be profitable on average, and just as the big bull market comes back on the scene. It may be a hard method but if one spends serious time on trading over several years or more, eventually it is probable that losses will abate and profitability will be found. As with anything in life, developing skills is a cumulative, even perhaps a compounding phenomenon. And the game of trading is one of the tougher ones. As with anything, long-term dedication will almost always pay off, even if people think your crazy for many years of being a loser.

There's something to be said for just hiring a financial advisor (or using a robo-advisor), but for many who are very persistent, fantastic gains can eventually be had in trading. I think this is a message that is too often passed over because the truth is it truly is a steep learning curve. But in addition to all that, it's really a fantastic profession, once you work out your risk management and become net profitable. Incredibly satisfying, IMO.

Plus I love the networking with other traders and those aspiring online. Sharing TA is a joy.
+9 Reply
lencoetzee Intratekram
@Intratekram, thanks for the honest and great comment, I thought I am the only one losing, but it must pay off, at some time you should have
that aha moment and off you go...... I hope...
Reply
Nikoratos Intratekram
@Intratekram looks like you're doing a fair job on that self awareness bit that you mentioned above. :beer: here's to persistence. Just pretend I know how to emoji in here.
Reply
@Intratekram, @Michael_Wang_Official

Thank you guys I When I started trading a couple of years ago I had beginners luck. In 2018 I had return of 30t%. I thought that was I great the following year 23%. Now I was trading on ego. This year I had the best negative numbers one could ask for (-87%) Losing so much capital making trades based on pure emotion caused catastrophic losses. With that said I stepped back and stopped trading . I read my daily journals. I lost money purely because of ignorance, greed and a false sense of knowing. I like to think I am smart but human nature protect your money. In process of protecting my money I made horrible trades that I should have stayed in. I stopped thinking about my daily goal of 1% - .05% per day. I had giant swings up in the beginning I started to get greedy and play insanely stupid option bets. Today I have am back on track to rebuilding what I lost. Slow and steady wins the race also though learning through my mistakes was like I said the great losses of this year taught me lessons I will carry for the rest of my life. I am no longer angry. I have disconnected money/emotion from the equation as much as possible. It's not the money that I trade for its the beauty of the tape, along with the Harsh lessons it can teach. The ability to trade and get returns of triple digits. ROI is important but if you do not love trading, I feel your more inclined to give your money to someone that does. I fell in love with compounding as well as leverage which cuts deep both ways. Losses are going to happen as I mature as a trader those same loses become strategic lessons. Reminiscence of a stock operator - " I had million lost million" great read even you do not trade.
Reply
Intratekram jamesjackcostello
@jamesjackcostello,

Thanks for sharing again, good to hear another story
Reply
Michael_Wang_Official jamesjackcostello
@jamesjackcostello, I can fully understand your situation. I've lost a lot of money as a beginner multiple times, and I can also confidently tell you that a lot of traders who are successful now had times when their accounts were completely wiped out. An airplane takes 10 minutes of warming up its tires before it can fly. All traders are like airplanes. Some take off almost immediately, without the need to warm up their tires, others take 5, 15, or even 20 minutes to take off. You'll never know how long it'll fully take before taking off, but as long as you don't give up, I can guarantee that you will see exponential gains, and experience the power of compounding firsthand. Thank you for sharing your story.
+3 Reply
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