[00:02] of retail traders lose money. That's a fact. Studies argue about the exact fact. Studies argue about the exact percentage 97% 90%. What percent of day traders lose money? But the fact is most people are losing money and a lot of it
[00:15] is from stupid mistakes, right? So I started out as a trader. I used to be a quantitative trader on Wall Street at Susuana. And the point of this video is to go through five mistakes I've seen so many beginner traders make and hopefully
[00:31] help you avoid some pain if you just don't do these things right. It's really important to invest in your trading education and you definitely mistake number five you are going to want to completely avoid. I've seen so many
[00:45] beginner traders just absolutely blow out their accounts due to this stupid mistake. But without further ado, let's get into the first mistake a lot of traders make, which is a little vague, but I'm going to go through specific
[00:57] examples, is the first mistake a lot of people make is they do not fully understand the products they are trading. A lot of new traders, they see a YouTube video about how some guy made a ton of money trading and if you just
[01:10] you're going to make a ton of money, too. And then they start doing it and they don't even fully understand how options work. So, when I started trading on Wall Street, I had to spend two years literally taking tests about options,
[01:25] doing trading simulators with fake money before I was ever allowed to trade a real dollar of the firm's money. And that's for obvious reasons. They want you to invest in your trading education. And most importantly, they want to make
[01:39] sure you know what you're doing before you actually start trading their money, the firm's capital. I'll give you some examples, some brief examples. is with options. This sounds crazy. If you're an options trader, this may blow your mind,
[01:52] but studies have shown, some of these studies are a little older because now most online brokerages auto exercise options that are in the money at options that are in the money at expiration. But previous studies have
[02:05] showed that about 5 to 10% of retail traders at expiration do not exercise in the money options. And if you don't know much about options, to put it bluntly,
[02:17] they are literally throwing away free money, burning money. So an option that is in the money at expiration means it has intrinsic value. It has value. So for example, let's say I own a call option with a 400 strike price. So that
[02:32] gives me the right to buy the stock at $400. It gives me the right but not the obligation. And let's say at expiration the stock is trading at $410. That's literally a free $10. I could buy
[02:46] the stock at $400 once I exercise my option and then go sell it in the market for $410 and make a $10 profit and it's actually $1,000 because each options contract controls 100 shares. So, if you
[03:01] think about it, the fact that most retail traders exercise their options, that's obviously a good thing, but it's a non-trivial amount who forget to do it even know what they're doing. That's absolutely insane. So, it's really
[03:16] important to fully understand the products you're trading. Stocks are a little more clear, right, how stocks work. However, some of these derivatives and futures, you really need to understand, you know, exercising just
[03:28] all these different dynamics that are critical if you want to make money. The second thing is a lot of people don't even understand how their option price is going to vary. So, I've made a video about the option Greeks. So, the Greeks,
[03:42] but there's four main ones. And I've made a YouTube tutorial on it, uh, on the Greeks, kind of the math behind it. You can check out the YouTube video here if you want to nerd out and let me know other video ideas to do as well. I love
[03:56] making trading content. I want to see more people not get crushed trading and I'm just doing these videos for fun. Long story short, like a lot of people don't even understand, wait, why did my option go down in value? So, I'll give
[04:10] you an example is if you own a call option, you have the right to buy a stock. not the obligation, but you have the right to buy a stock at a particular price. So, if the stock goes up, that's usually a good thing for you, right? If
[04:24] stock price to go up because you can buy lower than you can sell at in the market. Buying a call option is a bullish bet. So the Greeks help you quantify essentially they just help you
[04:37] quantify how does the price of your option change depending on different option change depending on different factors such as time implied volatility going to give you an example of how even if the stock moves in your direction a
[04:52] lot of retail traders get this wrong. They'll be confused. Why did my option go down in value if the stock went up? So, I'll give you an example of how you can lose money, which sounds crazy, on a call option if the underlying stock goes
[05:06] up, which is confusing to a lot of people, but especially after earnings, this actually has a word in trading. It's called IV crush, implied volatility crush if volatility collapses. So, basically, when you're buying an option,
[05:21] you are making a bet that the stock is going to move, right? You are long volatility. If you buy an option and the stock doesn't move at all, then all of stock doesn't move at all, then all of the exttrinsic value to your option just
[05:33] goes away. That's not a good thing. Your option just declines in value every single day that the stock isn't moving. So, I'll give you an example is let's say we have an option that is currently worth $15. Okay? And the delta of this
[05:47] worth $15. Okay? And the delta of this option is 0.5. So what that means delta is if the stock goes up by a dollar then your option is going to go up by 50 cents and then if the stock goes up by $2 you know approximately the value of
[06:01] your option is going to go up by a dollar. So let's say we think you know some company is going to have a great product launch and the stock price is So the company does this product
[06:14] announcement people like the product and the stock price goes up by $2. That may seem great, but let's say implied volatility was 50% and it drops to 40%. volatility was 50% and it drops to 40%. And Vega is 0.2. So what that means is
[06:28] our option is going to lose $2 due to Vega. So our option went up a dollar due to delta from the stock moving in the direction we want it to, but we lost $2
[06:40] from implied volatility collapsing because now implied volatility is saying this stock probably isn't going to move as much. So our option actually went as much. So our option actually went from $15 to $14 even though we were
[06:52] correct on direction. So I'll give you another example with theta. So let's say another example with theta. So let's say once again the delta of our option is 50 and um let's say this option is worth $8 and let's say theta is -1.2. So this is
[07:07] a shortterm option. Shorter term options as you get close to expiration theta time decay really picks up. So let's say over the course of a day, the stock price once again goes up by $2, right? So it's like, yo, the stock's moving in
[07:23] our direction. So we gain a dollar due to delta, but a day went by. The value to delta, but a day went by. The value of our option, the time value decays the value of our option by approximately $1.20. So we're actually down 20. Our
[07:37] option goes from being worth $8 to being worth $7.80, which obviously sucks. So, it's really important to invest in your trading education. I also recommend when you start trading, use a simulator. Don't
[07:50] even put real money in. I get it. Everyone wants to make money trading. I do too. But when you start trading, just like when you start sports betting, start out really small. Track your bets. Track your results over a large sample
[08:02] size. Anybody can win a trade. Anybody can have one successful trade or one successful day in markets. But being a long-term profitable trader, you got to trades over thousands and thousands of trades and then if you're profitable you
[08:16] can ramp up. That's kind of mistake number one is not fully understanding the products you're trading their nuances. This is absolutely critical if you want to be a profitable trader. Unfortunately, it's not as easy as just
[08:28] buying some course. So the second mistake a lot of beginners make is they underestimate the bidass spread and how much this matters. So basically trading isn't free, right? These trading firms, these market makers will have a spread
[08:43] between the bid and the ask. So you can see an example right here. Maybe a stock see an example right here. Maybe a stock is 100 bid 101 offer. So basically if the stock is fair, right, the midpoint would be $100.50.
[08:57] That's fair value. If you want to buy that stock, you have to pay 101. So you're already starting at a 50cent disadvantage. And a lot of traders don't consider this. I mean, I'll see traders who, you know, let's say there's an
[09:11] illquid small cap stock and its market is 230 to 250. And I'll see people be like, I want to own this stock. And they'll buy it at 250. The price doesn't like, I don't like the risk anymore. I'm
[09:26] going to sell it. And they sell it at 230. They just locked in a 20 cent loss and absolutely nothing happened. So, you really need to consider the bid ass spread. And one common thing a lot of new traders do is they overtrade.
[09:41] They're constantly buying and selling, buying and selling, racking up these transaction costs, doing complex options trades, and they're completely ignoring the bid ass spread and the high transaction cost they're paying. And
[09:54] it's the same thing in sports betting. For example, sports books for totals and point spreads typically charge minus 110 minus 110 juice. So, what that means is if you want to bet the over or the under, the over 42 half in this game or
[10:10] the under 42 half, you're betting at minus 110. So, you have to bet $110 to profit 100. So, I'll see people bet the over and they're like, "Yeah, I like the over. My friend liked it." They'll bet 110 to win 100. And then a few days
[10:24] later, their other friend will be on the under. Nothing has changed. And they'll be like, "No, I want to hedge. I want to bet the under." Well, you're actually not even really. You are hedging, but you're just locking in a loss. So, now
[10:36] you're just locking in a loss. So, now you've bet $220 total. One bet is going to win the over, the under, and one bet is going to lose. And on the bet that is going to lose. And on the bet that wins, $110 stake plus $100 in profit.
[10:49] So, all you did was lock in a $10 loss. So, another thing to mention is market makers are smart, right? I used to work in trading and these market making firms are very smart. They know where retail traders aren't very price sensitive and
[11:04] they can charge larger bidass spreads. They can offer uncompetitive prices and get away with it. And it's the same thing with sports books. So, for example, on sports books for mainline markets like money line spreads and
[11:18] totals, books only have a profit margin of about 5%. where they make a killing because they know it's only the real degenerates who don't really consider the odds they're getting that deeply. They'll make profit margins of 20 to
[11:31] They'll make profit margins of 20 to 30%. Studies have shown that. So sports books know where users are more price insensitive and basically they can rip them off. And it's the same thing in trading as a market maker. you know
[11:43] where retail traders mainly you know a lot more degenerates are trading and where you can really maximize your the edge of your trades and charge wider spreads. So you can kind of see a little graph here um that shows which you know
[11:57] essentially types of trades have the highest bid ass spreads and obviously the best way to lower the bid ass spreads that you're paying because again there are studies that have shown this is the main reason why most traders are
[12:10] losing money and what you really want to do is try to focus on more liquid assets. Granted, markets are more efficient. So maybe there's less alpha to squeeze out, but more efficient markets like Apple stock options have
[12:24] much lower commissions, bid ass spreads, transaction costs, whatever you want to think about, however you want to think about that term compared to a more liquid company company's options like some small cap stock. And then mainly
[12:37] you just want to avoid overtrading. Instead of doing some complex options trade, just buy a call option or a put option. Keep it simple, stupid does really do a lot long term. So the third reason a lot of traders lose money is
[12:51] they give into their behavioral biases. And you see the same thing in sports betting is if somebody has a losing day, the next day they'll fire off even bigger bets. They're not thinking rationally. They're not following their
[13:05] plan. They're letting their emotions take over. And this may sound a little bit anecdotal, but it's not. There's literally studies. is this. It's called prospect theory. There's a variety of studies that show that a lot of retail
[13:18] traders lose this way. Okay? And cutting off their winners. They're winning trades they're cutting off too early and they're losing trades they're
[13:30] holding on to too long trying to essentially recoup their loss. So you don't want to do that as a trader. You want to be very rational. You want to think rationally. And a good way to kind of avoid this is stick to your plan. I
[13:45] mean it sounds very basic, but as a trader, you are going to have loss aversion. This is very normal is on losing trades, you feel worse than on winning trades, right? So if you make $1,000 on a trade, that doesn't feel as
[13:59] $1,000 on a trade, that doesn't feel as good as it feels bad to lose $1,000 on a trade. So you don't want to let emotions take over. I mean, you see it in sports betting, you see it in trading is people start losing money and they just start
[14:11] thinking rationally and they blow up their whole account. Then they don't they go make more money and try it again. You don't want to do that. The fourth thing you want to avoid is chasing the hot news or the hot tips.
[14:26] Typically, when something's in the news, it's trending like GameStop. Specifically for options, that is when options are already most expensive. the premiums are the highest, the implied volatility is the highest. So I'll give
[14:40] you a simple example is when I was a quantitative trader at Susuana, one of the indexes or ETFs I was trading was Jets. So Jets was an airline ETF. So it has a bunch of different airline stocks. American Airlines, United Airlines. So
[14:55] during COVID, not many people traveling, there's so much interest in trading airlines. The world is ending. Nobody's ever going to fly again. implied volatility went through the roof, which basically means that buying call
[15:09] options, buying put options, buying straddles became insanely expensive, but because it was always in the news, it was always on Reddit airline stocks, right? Implied volatility stayed high. So the people who follow the news, but
[15:22] they're too late to the trade, they're buying extremely overpriced options, right? Market makers are selling these options at extremely high costs. And then obviously once the vaccine was announced for COVID implied volatilities
[15:37] come crashing back down. That's IV crush that we were talking about before and these options collapse in value due to Vega. So you don't just want to follow the hot hand. Whatever is trending on Reddit and everyone's already buying
[15:50] those options. Implied volatility has probably already skyrocketed and they're expensive. You want to build your own strategy. You want to be the first one in on a trade and your trade is such a
[16:02] good idea that other people follow it. Because if you buy options and then a bunch of other people follow it, they realize it's a good idea, the value of those options, simple supply and demand, implied volatility, the premiums goes up
[16:14] you're winning on your trade. So, long story short, like you want to be very careful about just chasing the hot news because typically you're buying high and selling low, which is exactly what you don't want to do. So the final mistake I
[16:29] see way too many new traders make is they use too much leverage. You don't want to be doing that. I mean leverage is the reason a lot of investment banks blew up in 2008 2009 during the financial crisis. So what exactly is
[16:44] leverage? Because I've seen so many traders in my experience trading watching other traders just on way too much leverage and get absolutely wiped out. It is when you control a position larger than your cash balance. So, if
[16:57] you have $1,000 cash and you're at 10x leverage, then you control $10,000 of options, stocks, or futures. And a lot of people don't even necessarily realize how much leverage they're on. If you're at 10x leverage, and there's a 10% move
[17:13] against you, you just lost your entire account. You just lost 100%. You just got wiped out. So people like leverage because your gains, your wins, your profit can be amplified, but it can also work in reverse. So futures as well as
[17:28] work in reverse. So futures as well as selling options is incredibly risky in terms of leverage. I mean, theoretically, selling a call option, you have unlimited downside, right? Uncapped downside. And you have to
[17:40] remember each options contract controls a 100 shares of stock. If you sell a call option and that stock triples, you are down a ton of money. And again, markets are somewhat random. No one knows when something's when something
[17:55] have the thesis when they're selling options. This stock isn't going to move that much, but obviously it's not always like that. Crazy things happen in financial markets. Now in the US there's a lot of regulations you know and
[18:10] essentially you'll often be forced to liquidate your position before it actually goes to zero. You'll be margin called but oftent times especially with options you're doing that when implied volatility spikes when the options get
[18:24] most expensive and you're getting some of the worst possible prices. So you're getting liquidated at the worst possible times to be liquidated which obviously stinks. And then if you want to think about other markets, not really US like
[18:40] the stock market or options or futures markets in some of these offshore crypto platforms, people just get wiped out consistently because they're trading with so much leverage. But again, in the US at least, there's some restrictions
[18:53] on how much leverage people can use. So here you can kind of see a chart on leverage for futures, options with some different metrics. And again, I think it's really important to realize everyone wants to make money trading.
[19:06] So, it seems easy to just use leverage as a way to win really quickly, but it's also a way to get absolutely crushed and lose a ton of money. And a very obvious example is let's say you have $10,000, you borrow $20,000 to let's say go buy a
[19:21] small cap stock. That stock immediately goes down 40%. Now, not only did you blow out your initial $10,000 of capital, but you owe the person you took the loan from $6,000. Again, like trading with leverage, very scary. You
[19:38] want to be very careful. And if you have any questions about this video, any of the mistakes whatsoever, comment them. Let me know other video ideas. Not selling a course, nothing like that. I just like making gambling videos about
[19:51] you enjoyed this video and thanks so much for your time,