Bleeding red! 5 reasons why every 9 out of 10 F&O traders lose money

While the number of F&O traders on Dalal Street has jumped exponentially over 500% in a span of just 3 years, 89% of individual derivative traders have lost capital with an average loss of around Rs 1.1 lakh, shows a latest survey of top 10 brokers by market regulator Sebi.

Options trading started becoming popular in India during the Covid lockdown days when the salaried class took it as a side hustle while working from home. Many even kept two laptops – one for office work and the other for punching trades – in the comfort of their home and away from the prying eyes of their bosses.

“These are the ones who lost their money. I have met well-educated and highly-paid employees losing lakhs in option trading,” said Delhi-based derivative trader Jitendder Singh, who had himself blown up his account once upon a time before learning the tricks of the trade the hard way.

Keeping the loss-making retail trader’s hope alive are self-styled gurus on social media, who are often ridiculed as ‘furus’ or fake gurus. Some such heroes claim to be making lakhs every day and are even willing to offer their secret recipe to newbies in paid coaching classes.

Here are 5 reasons why most option traders lose money:

1) Over on tips and advisory
Many retail traders, especially those moonlighting as a derivative trader, often get trapped in tips and advisory services being offered on social media platforms and in paid classes by amateurs. “Most think that since the other person is able to do it, I will also be able to. It is not as easy as it looks like,” Singh said.Bangalore-based trader Rajesh Sriwastava said although prop desks are minting money, many small traders find themselves on the wrong side because they follow hearsay rather than methodology.

2) Poor risk management
Bangalore-based trader Sivakumar Jayachandran, who runs OI Pulse, said when newcomers make one or two bad trades, the first thing they try is to recover the money. “In the process, their discipline and risk management process goes out of the window. Even in the last week, many people must have been thrown out of the market. On Wednesday, I had at least 5 people messaging me saying that I had blown my account,” said the options scalper, popularly known as Siva.

One of his personal risk management tools is to keep the previous day’s profit as a stop loss.

Sriwastava pointed out that newbies don’t know that in derivatives, you don’t win all the trades.

“Newcomers often bet everything and lose everything. Matured traders take it as a business and follow a set of rules and don’t take trading as a lottery ticket for overnight success,” he said.

3) Over trading
Reflecting the problem of frequent trading, the Sebi report found out that loss-making traders expended an additional 28% of net trading losses as transaction costs which includes brokerage, clearing fee, exchange fee, SEBI turnover fee, STT and GST.

“Over trading happens because of unrealistic expectations from the market. You don’t go outside when there is a storm,” Singh said.

Mobile trading apps and good data connectivity is making it easier for newbies to trade more. The other day Siva found a biker playing around with the Zerodha app while waiting at a traffic signal.

4) Psychology and discipline
While newbies get lost in the world of strategy, the key to trading success is in handling the mind. “Whatever strategy you deploy, unless your psychology and mindset is not there to execute it properly, the probability of you losing money is far higher,” said Singh who has been conducting workshops around trading psychology.

5) Moonlighting
While the topic of whether trading is a part-time job is a debatable one, experienced traders say one needs full screen time during trading. “Investing can be done part time but you can’t trade F&O part-time unless you are extremely lucky or able to give full screen time or using algos. I would strongly recommend not to do it alongside a job,” Singh said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)