Zerodha co-founder and CEO Nithin Kamath on Tuesday said most traders lose money through overtrading despite low brokerage charges these days.
“The biggest reason active traders lose money is overtrading, the low brokerage doesn’t help,” Kamath said.
Kamath, also known to regularly share educational content and stock market learnings on Twitter and other social media platforms, said people forget that trading costs are charged as a percentage of every trade and can compound very quickly.
“Costs like STT, stamp duty, etc. are charged as a percentage of every trade and compound quickly,” Kamath said, adding that traders can now see the total cost of the trade on the order form.
“Ideally, we should have introduced this feature even before the SEBI circular requiring all trading platforms to display costs on the order form. This was a miss from our side,” he said.
According to him, the biggest cost for traders is the impact, which still can’t be captured. Impact cost is the money lost due to the bid-ask spread.
“For example, if the bid is at Rs 100 and the offer is at Rs 100.2, buying at Rs 100.2 and selling at Rs 100 means a loss of 0.2% of the trade value. Impact costs aren’t obvious, but add up when you overtrade,” Kamath said.”Controlling your impulse to trade is like a person with a sweet tooth going on a sugar-free diet — assume that you’ll do something stupid,” he said.
Taking to Twitter, Kamath further said a bet sizing strategy will limit the damage and that should be the goal in case of over trading.
“The goal should be to limit the damage. With diet, it is to have fruits and sugar-free alternatives. With trading, it is bet-sizing. A simple bet- sizing strategy is to trade with as little quantity as possible most of the time. Increase it only when you have conviction and are trading well,” Kamath said in a series of tweets.
In such a scenario, even if one is overtrading, the risk, and the trading and impact costs don’t compound quickly.
The Zerodha founder also shared a research paper, which shows how low brokerage can lead to overtrading and can hurt the eventual outcome for retail traders.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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