Overtrading is the biggest reason why traders lose money

31 Jan 2023

The biggest reason active traders lose money is overtrading, the low brokerage doesn’t help. Traders forget that costs like STT, stamp duty, etc. are charged as a % of every trade & compound quickly. You’ll now see the total cost of a trade on the order form.

Ideally, we should have introduced this feature even before the SEBI circular requiring all trading platforms to display costs on the order form. This was a miss from our side. What can’t still be captured is the impact cost—the biggest cost for traders.

Impact cost is the money you lose due to the bid-ask spread. For example, if the bid is at Rs 100 & offer is at Rs 100.2, buying at Rs 100.2 & selling at Rs 100 means a loss of 0.2% of the trade value. Impact costs aren’t obvious, but add up when you overtrade.

Controlling your impulse to trade is like a person with a sweet tooth going on a sugar-free diet—assume that you’ll do something stupid. The goal should be to limit the damage. With diet, it is to have fruits & sugar-free alternatives; with trading, it is bet sizing.

A simple bet sizing strategy is to trade with as little quantity as possible most of the time. Increase it only when you have conviction and are trading well.This way, even if overtrading, the risk, and the trading & impact costs don’t compound quickly.

This research paper shows how low brokerage can lead to overtrading and can hurt the eventual outcome for retail traders. This is a moral dilemma for us on how much we are helping traders, by offering low-cost trading.

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