A Big Reason Why Traders Lose -
Traders are never more hopeful than when they are losing, and never more fearful than when they are winning.
There are many different reasons why traders lose - most of which are outlined in the Wiki ( WIKI - Read It! ). For the moment though I want to concentrate on the most obvious - You lose more money than you make. It is so self-evidentiary that it is almost tautological.
Let's take a look at an example of this:
It is 6/15 and you see RDDT at $180 - it bounced off the SMA 50 the previous day and looks Relatively Strong to the market. A decent long. Sure, the SMA 200 above but that could give you a good spot to evaluate the trade if it hits.
The next day though it drops. But you hold - perhaps you have some ITM Calls that are dated 2-3 weeks out and SPY is down for the day anyway. The next day it drops again but now you are close enough to the SMA 50 that you figure you might as well hold the position to see if support will stick. All of this makes sense. Of course one can argue that closing the long on 6/16 was the better play but most traders won't do this - call it Mistake #1. Finally the position breaks the SMA 50 and you close it for a big loss. At this point, patience has worn thin and you don't even consider waiting to see if it will hold the SMA 100. Plus - the market is looking weak and being long no longer feels like the right thing to do - Mistake #2.
So to recap: You went long - let's say an ITM Calls worth $8 - and lost roughly $7 per contract.
Like most traders you keep the stock you just had a big loss with on your radar and two days after you closed the position you see RDDT bounce back above the SMA 50. Call it revenge trading or just taking advantage of a good technical set-up (likely both) but you go long again. This time it works and you take profits especially since you have a bit of PTSD on the stock - Mistake #3. If you once again used deep-ITM Calls the pop from $169 to $175 probably gave you around $5 profit per contract.
Overall net loss on RDDT is $2 per contract. And this is best case scenario.
So what happens and what exactly are the mistakes?
Mistake #1 is entirely one of mindset - Traders do not like taking losses. Sounds obvious, right? I mean, nobody likes taking a loss. However, consider this analogy with Poker: You call a bet of $20, someone after you raises it up to $40, it comes back to you and you fold. This is common. The player here has no problem "losing" the $20 they bet as they have calculated they are already "beat". Traders/trading is different - we hate taking a loss, even if it is the exact right play. We always think things will turn around and get better. Our selective memory of all the times we closed a "loser" only to watch it reverse sticks in our mind as a constant cautionary tale. Ironically, traders are never more optimistic than when they are being shown evidence that their trade is not working. Should have this trader closed RDDT when half the green candle on the daily chart was erased? Of course. Do they? Most don't.
Which brings us to Mistake #2 - closing the trade after it has already lost 90% of its value (if you are using Options) just as major support is coming up. In this case, yes RDDT breaks the SMA 50, but the stronger support of the SMA 100 is right below that and is much more likely to hold. If you have shares you should absolutely not close this trade until that SMA breaks and is confirmed - but if you have Calls that have lost 90% of their value at that point it is just moronic to close it. But still - mindset once again ruins the day. How? Call it the "I am sick of the fucking trade" mindset. You now regret not closing it the second day, and you held it as it dropped again thinking the SMA 50 would finally kick in, but nope, that is broken as well. Finally you are fed up with the entire thing and want out - so you "rage close" the Calls for $1 or $2.
Naturally when you see RDDT bounce off the SMA 100 and then break above the SMA 50 again you are about ready to break some shit. Now you have two regrets on this damn stock but this time you are going to get even damnit! So you go long again - not a bad idea, I mean support held and you have your technical bounce. The next day you are in profit and you take it quickly. Herein lies Mistake #3 - remember when I said a trader is never more optimistic than when their trade isn't working? Well traders are never more pessimistic than when it is working. The moment you are in profit you start flashing back to the previous RDDT trade and how the stock personally injured you - and you are not going to let it hurt you again! Not you! So you take the profit - lest it reverse. I mean your thesis was correct, the chart is bullish - so why not completely doubt the entire thing?? That literally is where a trader should add to the position not close it. At the very least you should hold it until the SMA 200 is tested - but fear takes over and you take less profit than you lost previously.
We are never more hopeful than when we are losing and never more fearful than when we are winning - and that is why traders lose more than they win.
Best, H.S.