Zerodha's Nithin Kamath says the biggest reason active traders lose money is...

Zerodha CEO and co-founder Nithin Kamath said impact cost or the money lost due to the bid-ask spread is the biggest cost to traders.

Zerodha co-founder and CEO Nithin Kamath on Tuesday said that the biggest reason active traders lose money is overtrading. He also asked traders to control their impulse to trade.

In a Twitter thread, Kamath wrote, "The biggest reason active traders lose money is overtrading, the low brokerage doesn't help. Traders forget that costs like STT (securities transaction tax), stamp duty, etc. are charged as a percent of every trade and compound quickly."

He added that traders will now see the total cost of a 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," Kamath wrote.

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.

What can't still be captured is the impact cost—the biggest cost for traders. 2/6 — Nithin Kamath (@Nithin0dha) January 31, 2023

Nithin Kamath added that the biggest cost to traders -- the impact cost or the money lost due to the bid-ask spread -- cannot be captured.

"For example, if the bid is at Rs 100 and offer is at Rs 100.2, buying at Rs 100.2 and selling at Rs 100 means a loss of 0.2 percent of the trade value. Impact costs aren't obvious, but add up when you overtrade," the Zerodha CEO explained.

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Comparing controlling the impulse to overtrade and a person with a sweet tooth going on a sugar-free diet, he said that it can be expected that such traders may do "something stupid".

"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," he 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. The goal should be to limit the damage. With diet, it is to have fruits & sugar-free alternatives; with trading, it is bet sizing. 4/6 — Nithin Kamath (@Nithin0dha) January 31, 2023

Sharing a research paper on how low brokerage can lead to overtrading and can hurt the eventual outcome for retail traders, Kamath said, "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. This way, even if overtrading, the risk, and the trading and impact costs don't compound quickly."

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