F&O traders need better expertise, technological edge as 93% face losses: Capitalmind

The top 3.5 percent of loss-makers, roughly 4 lakh traders, saw average losses of Rs 28 lakh per person, including transaction costs.

F&O traders need better expertise, institutional knowledge, experienced team and technological edge to make profits, said Capitalmind Financial Services, following a recent study by the securities regulator SEBI showed a whopping 93 percent of individuals F&O traders lost money in three years.

Trading in derivatives is complex business due to the unpredictable, erratic and random behaviour of the market forces, added the financial services firm.

A SEBI study revealed that from FY22 to FY24, 93 percent of individual F&O traders experienced losses. During this period, 1.13 crore unique traders collectively lost Rs 1.81 lakh crore. Over three years, 92.8 percent of traders, about 1 crore individuals, lost an average of Rs 2 lakh each.

Also Read | SEBI study finds 93% of individual F&O traders made losses between FY22 and FY24

The top 3.5 percent of loss-makers, roughly 4 lakh traders, saw average losses of Rs 28 lakh per person, including transaction costs. Only 7.2 percent of traders made a profit, with just 1 percent earning over Rs 1 lakh after expenses.

"According to the study, most traders, regardless of capital size, incur losses. The percentage of traders losing money doesn’t change with the amount of trading capital," added Capitalmind.

A study reveals that nearly all F&O traders (99.3 percent) traded options at least once during FY24. Of these, 94.2 percent focused solely on options, with only 5.1 percent trading both futures and options. A mere 0.7 percent traded only futures. Interestingly, the small 5 percent of futures traders saw average profits during the period.

According to Capitalmind, this shows that trading a simpler instrument like futures, which typically depends only on the price of the underlying asset, gives you an advantage in a one-sided trending market while options are complex. "Their movement depends on several factors: the price of the underlying asset, time to expiry, market volatility, and the invisible hand of the market," said the note.

The study further reveals that in FY24, all the profits were made by proprietary firms and Foreign Portfolio Investors (FPI) through algorithmic trading. This trading mainly involves High-Frequency Trading, arbitrage, trend following, or other quantitative strategies. Though, the data shows that some individual traders who used algorithmic strategies also incurred losses overall.

According to Capitalmind Financial Services, this means that simply investing through an algorithm isn’t enough. The algorithm must be able to capitalize on market anomalies and inconsistencies to be profitable.

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