9 Out of 10 Traders Lose Money in F&Os (2024)

FAQs

9 Out of 10 Traders Lose Money in F&Os? ›

In plain terms, it's vital to grasp that a staggering 9 out of every 10 traders who venture into Futures and Options (F&Os) end up losing money. This fact highlights the considerable difficulties faced by most people in this financial arena.

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.

Lack Of Discipline

However, many new traders enter the market with a casual mindset, often influenced by the stories of quick riches. This lack of discipline leads to impulsive decisions and poor trading plans that fail to analyse the market thoroughly.

According to various studies and reports, between 70% to 90% of retail traders lose money every quarter. This article will discuss the main reasons retail traders lose money and how they can enhance their performance and profitability.

Out of the 45.24 lakh individual traders in futures and options (F&O) in the financial year 2021-22, only 11% made profit, shows a report by Securities and Exchange Board of India (Sebi). Out of the total participants, the number of individual active traders stood at 39.76 lakh (88%).

The potential for loss is theoretically unlimited for the seller of a futures contract and is substantial for the buyer. Options, on the other hand, have limited risk for the buyer (the most you can lose is the premium you paid), but unlimited potential profit.

In my opinion, this is due to the neglect of some crucial aspects of options trading. Know Your Enemy in Options Trading becomes very essential. The majority of errors and losses arise out of that. Options are very mathematical when it comes to pricing them.

Lack of a clear strategy: Options trading requires a well-defined strategy. If options buyers do not have a clear plan, exit strategy or risk management in place, they may make impulsive decisions that lead to losses.

Options lose value over time due to a decay in time value. So, the longer the option buyer holds onto the position the more is the decay in time value of the option, resulting in losses for him. Solution: The combination strategies mentioned above can also help you to reduce your losses arising from time value decay.

What is the 90% rule in trading? ›

It is a high-stakes game where many are lured by the promise of quick riches but ultimately face harsh realities. One of the harsh realities of trading is the “Rule of 90,” which suggests that 90% of new traders lose 90% of their starting capital within 90 days of their first trade.

According to a study by Sebi, in FY22 only 11 percent of individual traders in the equity F&O segment made profits, with an average profit of Rs 1.5 lakh.

F&O trading carries significant risks due to leverage and price volatility. Risks include market fluctuations, liquidity issues, and unexpected events affecting prices. Traders should have a thorough understanding of F&O products, employ risk management strategies, and only trade with funds they can afford to lose.

Day trading is extremely risky.

And day traders typically end up on the wrong side of a trade more often than not. A study found that traders who lose money account for anywhere between 72–80% of all day trades being made. It's just not worth the risk!

But that's not all, the biggest reason day-traders lose money is the risk they take on. Day traders are more likely to make risky investments to reach for those higher potential returns, and as you can probably guess, high risk = high potential loss. You make a 15% return in 1 year (which is a great return by the way!)

Another reason why day traders tend to lose money is that it's very different from long-term investing. While traders take advantage of price swings (which means they have to make specific predictions), investors tend to buy a diversified basket of assets for the long haul.

Average Trade Loss refers to the average amount of money lost on each trade executed within a specific trading strategy or portfolio over a defined period. It is a crucial metric used in the field of finance and investment to evaluate the effectiveness of a trading approach and assess risk management practices.

Average Profit per Trade: Divide the total profit (or loss) by the total number of trades to obtain the Average Profit per Trade. This metric represents the average amount of profit (or loss) gained or lost per trade executed.

We multiply the purchase value by the lot size and then multiply the sales value by the lot size. The difference between this gives us the profit or loss, which is the turnover.

Ideal Range. An ideal loss ratio typically falls within the range of 40% to 60%. This range signifies that the insurance company is maintaining a balance between claims payouts and premium collection, ensuring profitability and sustainable growth.