More than 55% F&O traders buying more to average out losses: Study (2024)
The frenzy to trade in futures and options among newbie investors has landed up drilling deep holes in their pockets, and there were 4 major factors in play, according to a study conducted by Sharekhan.
The study done by Sharekhan found that 55% of the new traders have ended up buying more to average out their losses in trade. In fact, in 45% of the cases, it’s the lack of knowledge that left traders bleeding.
Recently, the Securities and Exchange Board of India (SEBI) issued a report, stating that 9 out of 10 individual traders in the equity F&O segment incurred an average loss of Rs 1.1 lakh during FY22, with most of them operating in the options segment.
A pan-India survey called ‘Serious About The Markets’ by Sharekhan revealed that 13% of the newcomers have incurred losses due to the lack of enough trading knowledge. Further, 32% of them claimed they couldn’t judge the market movement.
Around 40% of newbie traders claimed that their main reason for entering the F&O segment was due to the chance of making quick and easy money, and 48% of them believe that
30-50% of the people are consistently making ‘good returns’ from the F&O segment.
Dependence on Non-Professional Advice
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A significant 53% of the traders are spending their trading capital most often based on inputs from family and friends and mentions on social media/ websites/YouTube videos, which can lead to ill-informed trading decisions and increased risk.
Lack of Applying Strategies A startling 35% of traders claimed that they do not use or apply any specific trading strategy, which can often lead to risky trading decisions. Only 5% of traders claim they are using algo strategies provided by specialized companies/websites
Inadequate Use of Stop-Loss
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Only 42% of traders claimed that they use stop-loss in half of their trades, whereas 16% claim they use it very rarely, indicating a key component in managing trading risks effectively is not being used enough.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
Sharekhan is an Indian retail brokerage full-service brokerage firm, that as of 2020, was the fifth largest full-service firm and the 8th largest stock broker in India with 16 lakh customers.
found that 55% of the new traders have ended up buying more to average out their losses in trade. In fact, in 45% of the cases, it's the lack of knowledge that left traders bleeding.
The 2% rule is a risk management principle that advises investors to limit the amount of capital they risk on any single trade or investment to no more than 2% of their total trading capital. This means that if a trade goes against them, the maximum loss incurred would be 2% of their total trading capital.
The 2% rule is a money management strategy where an investor risks no more than 2% of available capital on a single trade. Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price.
Additionally, there was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing by over 500 per cent from 7.1 lakh in FY19 to 45.24 lakh in FY21, the study noted.
Averaging is the process of opening additional positions with a standard or increased volume after execution of the first trade. You can average a loss-making position with the purpose of taking the whole series of trades into the black.
However, if the stock falls 7% or more below the entry, it triggers the 7% sell rule. It is time to exit the position before it does further damage. That way, investors can still be in the game for future opportunities by preserving capital. The deeper a stock falls, the harder it is to get back to break-even.
The golden rule of Stop Losses is that they should never be moved away from the market once the trade is opened. If a trader feels that their stop loss is incorrectly placed, they are recognising that the foundations of their trade are incorrect and therefore they should close out.
The Rule of 72 is not precise, but is a quick way to get a useful ballpark figure. For investments without a fixed rate of return, you can instead divide 72 by the number of years you hope it will take to double your money. This will give you an estimate of the annual rate of return you'll need to achieve that goal.
Summary. Learn about the 8-4-3 rule of compounding, where investments double within 8, 4, and 3 years, showcasing exponential growth. It emphasizes staying dedicated to investment plans, guarding against inflation, and adapting to market changes.
If you become unemployed in the calendar year when you turn 55 (or after that), you can access the funds without having to pay the 10% penalty. No need to wait until age 59½. In fact, if you have a 401(k) at another employer you left long ago, you can access those funds as well.
Recently, the Securities and Exchange Board of India (SEBI) issued a report, stating that 9 out of 10 individual traders in the equity F&O segment incurred an average loss of Rs 1.1 lakh during FY22, with most of them operating in the options segment.
His agency, the Securities and Exchange Board of India, known as Sebi, says 90% of active retail traders lose money trading options and other derivative contracts. In the year ended March 2022, the latest for which figures are available, investors lost $5.4 billion.
When Is Averaging Down a Good Idea? Averaging down works best when you are confident that an investment is a long-run winner. As such, buying the dips will have you accumulating your position at progressively better prices, making your ultimate profit potential greater.
Averaging down is an investing strategy that involves a stock owner purchasing additional shares of a previously initiated investment after the price has dropped. The result of this second purchase is a decrease in the average price at which the investor purchased the stock. It may be contrasted with averaging up.
Average up refers to the process of buying additional shares of a stock one already owns, but at a higher price. Averaging up can be an attractive strategy to take advantage of momentum in a rising market or where an investor believes a stock's price will rise.
A common practice is to set the stop-loss level between 1% to 3% below the purchase price. For example, if you buy a stock at Rs. 300 per share, a 2% stop loss would be triggered at Rs. 294, helping you limit potential losses while accommodating normal market fluctuations.
The best trailing stop-loss percentage to use is either 15% or 20% If you use a pure momentum strategy a stop loss strategy can help you to completely avoid market crashes, and even earn you a small profit while the market loses 50%
Although there is no general way of structuring your stop loss and take profit orders, most traders try to have a 1:2 risk/reward ratio. For instance, if you are willing to risk 1% of your investment, then you can target a 2% profit per trade.
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