“In the stock market, the most costly tuition fee is the one you pay through your losses.” – A saying that is often quoted among experienced traders at Dalal Street
The recent influx of retail investors in India has been phenomenal. From 3.6 crore demat accounts in March 2020 to reaching the 12 crore mark in early 2024, India’s market scene has undergone a remarkable turnaround. Due to easy-to-use trading applications such as Zerodha, Groww, and Upstox, it has never been simpler to join the market.
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But with easier access comes greater responsibility and, regrettably, many expensive errors.
As an individual who has spent years studying the Indian markets and interacting with hundreds of retail investors in Mumbai, Bengaluru, and elsewhere, I’ve seen recurring patterns in how newbies tackle trading. These errors aren’t restricted to those trading from urban cities—they’re as common among the increasing number of investors from Tier 2 and Tier 3 cities who are now entering the market.
Let’s explore the five most prevalent trading errors that new investors commit in the Indian scenario and how you can prevent them.
1. Trading Without a Clear Strategy
Saurabh, a Pune-based 28-year-old software professional, began trading following news of his colleague’s overnight gains in Tata Motors. He was thrilled at the promise of money, quick as lightning, and invested in stocks on tips from WhatsApp groups and YouTube “gurus.” His portfolio lost 35% in three months.
The Problem: Most new traders go into the market without a clear strategy. They go from one “hot tip” to the next, and they buy high and sell low. The popularity of financial influencers or “finfluencers” on such platforms as Instagram and YouTube has fostered a culture of instant tips and superficial analysis. In a 2023 SEBI survey, more than 60% of new investors aged under 30 use social media to seek investment advice.
Solution: Create a trading plan before you place your very first order.
Specify:
- Your risk tolerance
- Time horizon
- Capital limits for deployment
- Entry and exit strategies
- Familiar types of stocks that you wish to trade
Don’t forget the wise words of veteran investor Ramdeo Agrawal, who frequently repeats, “Risk comes from not knowing what you’re doing.”
2. Disregarding Risk Management
In the 2022 market correction, when the Nifty dropped by almost 15% from its highest point, Priya, a Chennai teacher, had invested all her savings in high-beta midcaps. With no stop-losses, she helplessly saw her portfolio value decrease by more than 40%.
The Problem: New traders tend to risk too much money on risky individual trades or categories of stocks and do not use stop-loss orders. Indian markets, particularly in the space of small and mid-cap, can be savage when it comes to volatility. During 2021-22, while the Nifty 50 fluctuated about 20%, several individual stocks had a 50-70% range of swings.
Solution:
- Never risk more than 1-2% of your trading capital on one trade
- Always employ stop-loss orders (mental stops aren’t sufficient!)
- Apply the 6:3:1 rule that’s widely followed by traders in Mumbai’s trading community: Of every 10 trades, get 6 small victories, 3 defeats, and 1 major victory
As Nithin Kamath of Zerodha, a regular reminder to traders: “It’s not about how much you make, but how much you don’t lose that makes you successful in trading.”
3. Allowing Emotions to Make Decisions
The Adani Group saga of 2023 is a case in point. As Hindenburg Research’s allegations led to Adani shares crashing, others panicked and sold at huge losses. Others, with FOMO when the shares started going up again, bought at exaggerated prices to endure volatility once again.
The Problem: Fear and greed are strong feelings that have the ability to overrule rational choice. Indian retail investors tend to have a strong emotional attachment to some stocks, especially those with a nationalist connotation or a family habit of trading in some blue-chip stocks like HDFC Bank, Reliance, or TCS.
Solution:
- Keep a trading journal recording not only your trades but your emotions
- Make rules about when to enter and close a position, and adhere to them
- Consider rule-based orders to automate some parts of your trading
- Practice meditation techniques such as those taught in NSE’s investor awareness workshops
As Rakesh Jhunjhunwala once put it, “Markets are never wrong; opinions often are.”
4. Overtrading and Chasing Losses
Amit, who runs a small business in Indore, began trading index options during the pandemic. He had initial success with some F&O trades, but then started growing his position sizes and frequency of trades. He lost money after that and attempted “doubling down” to make up for the losses before losing ₹7 lakhs within two months.
The Problem: Most newbies mix activity with success, thinking more trades equal more profit. When they lose, they trade even more to “win it back.” The F&O segment in India has experienced explosive growth, with a monthly turnover of over ₹200 lakh crore. However, SEBI research indicates that nearly 90% of active F&O traders end up losing money, with an average loss of ₹1.1 lakh per trader.
Solution:
- Establish daily, weekly, and monthly limits for trading
- If you reach your self-determined loss level for the day, stop trading
- Trade as a marathon and not a sprint
- Practice the 3-day rule: When you incur a major loss, take three days off from trading to be mentally balanced
As Zerodha’s analytics of their trading platform shows, traders making fewer than 5 trades per day are more likely to be profitable than those taking 15+ trades a day.
5. Lack of Ongoing Learning
While Deepak, a Jaipur college graduate, earned fast money in the post-COVID bull phase, he thought he was an expert in trading. He disregarded shifting market scenarios and technical charts, even as the mood in the market changed later in 2021. His initial winnings were totally erased.
The Problem: Most new traders confuse bull market gains with trading ability and do not adjust to evolving market conditions. Indian markets are different due to domestic drivers such as monsoon cycles, government policies, and international drivers impacting our highly import-based economy.
Solution:
- Spend a minimum of 5 hours a week learning about market principles, technical analysis, and economic indicators
- Participate in established trading forums such as Trading Q&A by Varsity (Zerodha) or TradeMarket India
- Attend NSE or BSE workshops in your city
- Track the analysis of renowned Indian market gurus such as Madhu Kela, Shankar Sharma, or Dr. Neelkanth Mishra
Reflect on how the great D-Street investor Vijay Kedia still stresses the need for ongoing learning even after decades in the market: “In trading, the day you think you know everything is the day you should quit.”
Final Thoughts
The liberalization of trading in India has brought to the ordinary Indian unprecedented opportunities for wealth creation to the ordinary Indian. Yet, as the SEBI investor survey of 2023 revealed, just 27% of active traders declare steady profitability.
It’s the difference between successful traders and everyone else that usually boils down to not making these five basic errors. With a well-formulated strategy, strict risk control, managing emotions, not overtrading, and a willingness to learn every day, you’ll be equipped to handle the thrilling but also demanding world of trading in Indian markets.
Don’t forget what industry old-timer Raamdeo Agrawal points out: “To make money in the stock market, you need to be right just 51% of the time. The secret is limiting your losses when you’re wrong.”
For those serious about mastering the markets, ZebraLearn’s visual learning books provide the illustrated concepts and practical knowledge needed to avoid these common pitfalls and develop sustainable trading habits.
Happy trading!
