It is a well-known fact that almost 80% of the options traders lose money and only the remaining 20% are successful. There are various reasons why options traders lose money including lack of market knowledge and the right trading skills. Also most of the traders tend to get emotional and do not follow a disciplined approach in making their investments because of which they suffer huge losses. The top 10 reasons for options traders to lose money are listed below,
· 1. Trading huge positions and investing too much on a single trade:
This is a problem with many of the newbie investors who are too emotional and lack good understanding of the trading strategies. An inexperienced gambler tends to stack all his chips on a single play and it never works. Similarly if you put all your money on a single trade and you lose that trade, you will not be able to invest anymore. In some cases even experienced traders give up their risk tolerance and invest too much on a single trade, hoping to make up for their past losses. This is one of the important reasons for options traders to lose money as they become too greedy and don’t follow a proper trading strategy.
· 2. Lack of market knowledge:
The next important reason for options traders to lose money is lack of market knowledge and not being aware of what are the various financial events happening currently. If you don’t follow the market news regularly and are not aware of the trends in price movement of the underlying assets, you will not be able to place successful trades. As you know the market is always volatile and keeps fluctuating based on the investor sentiment, financial events like announcement of interest rate hikes, jobs report, quarterly earnings report of various companies and various geo-political factors. You should be aware of all these events happening in the market and follow it very closely. If you don’t have the market knowledge and are not able to predict the price movement of your underlying asset, you will always lose money in options trading.
· 3. Lack of a proper trading plan:
A good trader should always have a clear trading plan which is formulated with well-defined entry and exit criteria, position size and the amount of investment. If you trade without devising a proper plan, the results will always be random and there is a great chance you might lose most of your trades. Along with proper trading plan, choosing a reliable broker and trading platform is also very important. anyoption trading is one of the reliable trading platforms through which you can minimize your losses and maximize your returns as a binary options trader.
· 4. Lack of Understanding of the risks and rewards associated with each trade:
Some traders do not clearly understand the concept of risk/reward profile. The traders who suffer huge losses in the initial stages of their career will end up fearing risk and avoid investing in the right opportunities that may come up in later stage. In the same way people who witness success in the early stages tend to become greedy and start investing heavily leading to potentially huge losses. This is all due to lack of understanding of risks and rewards associated with options trading and lack of discipline.
· 5. Not having a mentor or Guide:
It’s always good to have a mentor or coach who can help you make right decisions during difficult times. Many unsuccessful investors regret that they did not have the right mentor to guide them during tough situations and was not sure of their trading decisions. If you don’t have an experienced investor as your guide to warn you about unforeseen events or sudden twists in the market, you may end up losing more money in options trading.
· 6. Lack of trading skills and consistency:
Traders who don’t develop the right trading skills are the ones who place losing trades. If you want to make more money in options trading, you should be consistent and make lot of trades with smaller investments. If you invest only during specific time period and remain dormant during rest of the time, you might miss the right opportunities and eventually lose money.
· 7. Not using Signals and Technical indicators:
You should always make use of technical indicators and signals to get better understanding of the market trends, whether you are an experienced or novice investor. Only people who make use of technical indicators and trading charts will be able to predict the price movements of assets more accurately. Investors who are ignorant of such tools have a greater probability of losing money.
· 8. Lack of reliable trading strategy:
Traders who don’t follow effective trading strategies always have a higher chance of losing money. There are various trading strategies like Hedging strategy, Trend trading strategy, MACD entry trading strategy, risk reversal strategy etc. Investors should know which trading strategy is suitable for them based on the type of trading and follow it effectively. Traders who fail to adopt a reliable trading strategy will end up in losses.
· 9. Emotional Trading:
Human psychology plays an important role in trading decisions made by investors which is an important factor for success. Fear and Greed are two destructive emotions which can influence your trading decisions and result in failure. People who take trading decisions based on these emotions are the unsuccessful traders.
· 10. Not following hedging or stop-loss techniques:
Some investors are greedy and make use of leveraging which is very risky and results in big losses. If you don’t follow stop-loss orders or limit your position size, you will not be able to restrict your losses. You should also learn to use hedging techniques to minimize your losses in each trade. Traders who fail to adopt these techniques are the ones who lose more money than others.