Understanding why you are losing money

It’s always bad news when a vessel is on the rocks.  However what makes it worse is when the ship is not only grounded but surrounded by thick impenetrable fog.   Apply this message to the situation of the trader. Losing money is painful; it hurts the pride and hurts the pocket and if it carries on for too long it can have consequences which are serious or even fatal.   Anyone will tell you that you need to learn lessons from failure – and indeed the lessons of success.  Let’s take a look at a few….

The basic law of trading whether your commodity is money, stock, prize bulls or property is very simple.  You buy low and sell high – that way lies a profit. If you find yourself buying high and selling low, something is going wrong.  Best advice is to get offline and try figure it out.

Many traders will trade on the margin, financing the trade by borrowing money from their broker. This is not an unusual occurrence in areas such as options and futures but it brings with it that the broker will implement a margin call when he asks you either to increase the amount of money in your account or to cash in some of your assets.   Come a stock market crash and you might not have any – or enough – assets to cover a margin call because their value may have deteriorated.  Similarly Forex traders, who have the dilemma of playing in a 24 hour market but being human still need to sleep sometime, can wake up to find that prices have moved dramatically during their slumber time and that positions have been sold off.

Some factors that “help” you lose money are way beyond any individual’s control but you need to be aware of them and modify your behavior accordingly.   Since the financial crash of the last decade, interest rates have been at a low level almost without precedent. If someone is keeping money in a savings account paying low interest and having to buy goods subject to inflation, he is losing out.    Inflation itself is an ever present danger. If inflation starts to take off, investors will struggle to keep the value of their investments which won’t match the deterioration of the currency.

Forex investors have to be aware of the effect that changes in exchange rates can bring about – increasing or decreasing the value of goods and services that are imported or exported.

Another way of losing money is on commissions. Almost every time that a trader places a trade, he has to pay a commission to his broker which automatically reduces the value of any investment. 6% may not seem like an enormous sum but taken over a large series of trades, it can begin to stack up. Look for a cheap investing site which will enable you to cut down on the amount of commission you are paying.

The moral of all this is be aware, think carefully and always be on the lookout for ways to obviate losses.

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