Why traders lose money during intraday trading

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Published 28 December 2021

Nobody goes into trade with the intent to lose money but like the old quote says, “By failing to prepare, you prepare to fail”. Back in the day, trading was not popular in Africa. It was seen as something “western “. Today, that has changed as the appetite is now high in Africa.

Retail trading has been steadily growing in Africa for last 6 years with the high number of low-cost online brokerages targeting the region. Many brokers have been licensed locally with the strengthening of local regulations and infrastructure surrounding capital markets & retail trading in countries like South Africa, Kenya, Nigeria and Egypt.

A growing number of traders in Africa are now trading the global markets like stock markets, commodities, and forex. Last year saw almost 50 per cent growth in retail trading volumes in Africa. The Kenyan Wall Street journal stated that there are about 1.3 million forex traders in Africa of which 200,000 were from Nigeria alone.

And in Nigeria, the volume of trades by retail traders in the NGX has been increasing in the last few years with increased efforts by NGX to increase retail participation.

Thanks to the proliferation of online trading platforms like Cardinal Stone, Stanbic IBTC, Coronation, Cowrywise, OctaFX, Hotforex, FXTM etc., you can now initiate a trade from your bedroom!

The availability of online trading to everyone means people need to be more educated about the markets and trading techniques so as not to record loses.

As per Forex Beginner, “Most new traders lack the understanding of trading and the trading discipline due to which they lose money in day trading”.

Okay I Get it, but What Is Intraday Trading?

Intraday trading refers to trading of securities within a 24 hour period. Securities bought at the beginning of the day must be sold at the end of the day. Securities prices keep fluctuating throughout the day and intraday traders try to make profit on price movements of the assets during the day.

Intraday traders can trade with margins, meaning they pay only a percentage of the price of the security and they don’t own the stock. If a security costs N100 and the broker requires a 10% margin to open the position, the trader pays just N10 while the stockbroker loans him the balance of N90.

The trader also puts down some cash to serve as collateral and also pays a fee to the broker for his services.

The trader needs to open a special brokerage account also called a margin account into which the broker will disburse the loan.

If at the beginning of the day the security cost N100 and by the end of the day it costs N150, the trader could sell and make a profit of N50. However, if the price of the security falls to N20 during the day, the trader makes a loss.

Traders employ different strategies and indicators to guide them in making the right decisions during trading.

What are the strategies used by day traders?

Common trading strategies include Scalping, Range trading, and News based trading.

And what are the common Indicators?

Common indicators include Moving Averages, Bollinger bands, Strength index, Commodity channel index, Oscillators.

Why you may Lose money in Intraday Trading

An intraday trader needs to come in prepared. Here are some reasons you might find yourself going home without a profit.

  • Trading via a Broker that has a conflict of Interest

One of the main reasons that traders lose is because many traders trade via brokers that are dishonest or fake or are trading against you. This is most common in Forex trading, which is a popular instrument among traders in Nigeria.

For example, in forex trading it is common that many CFD brokers are market makers, who may have conflict of interest with the traders. That is, the broker makes a profit when you lose, so the broker may use tactics to make you lose.

If you are trading in the forex market via a CFD broker then choose a broker that is STP or offers direct market access. There are said to be several forex brokers in Nigeria like HotForex, ForexTime that have No Dealing Desk trading accounts & offer direct market access to the traders, where there is low conflict of interest as compared to a broker that are trading against you.

  • Averaging a Position

This is trading more aggressively to try and cover your losses. After recording a loss, most traders get desperate and begin to trade with more money hoping to offset their loss. This is also called overtrading and it’s not advisable as you are now trading based on emotions and may end up losing all your funds. It is advisable not to trade with more than 2% of your capital in a day.

  • Relying on Hear Say and Rumors

Most traders join trading WhatsApp groups and forums where people share a lot of ideas on trading and try to influence others. Be careful about such advice. Everyone has a different risk appetite so theirs might not be the same as yours. Trade with your own well-researched plan.

  • Overconfidence

After making a profit, a trader is naturally tempted to step up and invest even more. Always stick to your plan. If the plan was to make N10,000 profit at the end of the day then after you make it just close your position. Shut down your computer and go for a walk.

  • No Stop Loss

A stop-loss order is an agreement between you and your broker that once the price of a security gets to a predetermined point the broker should either sell or buy as the case may be.

In intraday trading for example, the trader can give a stop loss order that says once the price of a stock drops below N40 per unit the broker should quickly sell off the stock and close his position to avoid him losing more money.

This is a responsible thing to do while day trading and traders should be disciplined enough to put this in place. Most stocks, derivatives and forex brokers in Nigeria offer Stop Loss protection tools like Stop Order, Limit Order and Stop Limit, that you can use while placing a trade.

  • Trading Illiquid Stocks and Securities

It is advisable to trade in securities that can be sold easily because at the end of the trading day all securities must be sold and your position squared off or closed. If there is no buyer for the security you are forced to pay the full value (remember you paid only a percentage initially) and the security is delivered to you in your CSCS account. A CSCS account is an account that houses your securities and you need it for trading.

  • Going Against The Trend

Before trading, a technical analysis of the security should be carried out. Technical analysis uses price and volume of stock to determine a trend. If the price of a security is trending upward it is better you quickly buy this security as the price is likely to increase even further and then you can sell and make a profit. When the price of a security is trending downward its safer to sell quickly as the price may drop further and you may record a loss. There’s a popular saying that trend is your friend and this has proven to be true at least in intraday trading.

Day time traders may get anxious when the price of a security is going down and trigger their stop loss order too early. Most times when the prices are dropping they end up regaining momentum again so a little bit of patience is required, if not you could spend all day doing nothing. A little bit of risk appetite is required.

  • Unbalanced Portfolio

Do not focus on only one type of security. Spread your wings! Trade in different securities to increase your chances of making a profit.

This balance must be maintained during trading as the portfolio may lose balance as prices fluctuate. This balance is maintained by getting rid of unwanted securities and replacing them with new ones that fit your risk appetite.

  • Not Having a Plan

Before trading you must try to see the end from the beginning. Think of it like a politician preparing a victory speech and a concession speech before an election. In the event he wins or loses, he has a speech for any outcome. The plan should contain some of the following:

  1. How much are you willing to lose in a day?
  2. How much profit do you plan to make in a day?
  3. In the event you cannot sell all the stocks at the end of the day are you willing to own those stocks for long term?

The plan should also be executed completely because what good is a plan if you’re not going to execute it right?

  • Not Keeping Records

Trading is a learning process and you learn from your losses hence the need to document every step you take. Your records should be detailed as this will serve as feedback.

Keeping a log of all your activity helps you reflect and figure out where you got it right or wrong. Good record keeping helps a trader know if he stuck to the trading plan or if he/she got distracted.

Always open a fresh journal before the trade and close it when the trade is completed. Write everything down even what you were doing, your state of mind while trading. Screenshots aren’t a bad idea either. Nothing is too petty to record.

  • Lack of bird’s eye view of the market and trade structure

Before trading you should conduct an analysis. This gives you a bird’s eye view of the security you’re about to trade. Analysis, could be either fundamental, technical, or a combination of the two. Day time traders prefer to use technical analysis. Let’s us explain both analytical methods

  1. Fundamental analysis: Used for long term trading, it aims to find out the real price of a security. It does this by diving deep into the history of the security and considering factors like corporate governance of the company and economic indices.

If the fair price is higher than the current trading price the trader is advised to buy the security and vice versa.

  1. Technical analysis: Doesn’t bother about the fair price as it attempts to predict market movement by referring to historical trends and the use of charts.

The charts have support and resistance areas which you can maneuver to make a profit.

  • Support zones— when the price of a security keeps falling on the chart, it gets to a point where it stops falling and begins to rise. That point is called the support level. Traders should stop buying once the stop zone is reached.
  • Resistance zone— a security experiencing an upward trend gets to a point or ceiling where the price begins to fall. That point is called the resistance level. Traders should stop selling when the resistance level is reached to prevent losing.

Conducting this analysis helps keep afloat in day trading.

Before you start, understand the trade and the risks

Intraday trading can be profitable as you can use leverage to buffer your trades. However you should get in with a plan and sufficient analysis of the securities you intend to trade. You must also be ready to accept some degree of loss. You must not be greedy and make little profits at a time till you become an expert. If you do this then you can be a successful intraday trader.