Recently, I’ve noticed that quite a lot of people in the stock market are crying about being “short on money.” Losing money on stocks has truly become the norm for many retail investors. I’ve gone through these pitfalls myself too, so today I’d like to share some lessons I figured out over the past few years.

To be honest, retail investors are more likely to lose money than institutional investors, and there’s a reason. First, they don’t do any homework before getting into the market. Many people perform well in their own main jobs, but the moment they touch stocks, they end up losing terribly. The key is: “You don’t understand, yet you insist on playing anyway.” If you can’t read trends, can’t tell bull from bear markets, and don’t know how to pick stocks, you just follow others and buy blindly. Then you hold on when prices rise and hold on when prices fall. In the end, you become a long-term bag holder, stubbornly refuse to cut your losses—so of course it’s easy to lose all your principal.

Another issue is mindset. Many people, as soon as they enter the market, start thinking about making big money by doubling their money in the short term. But even Warren Buffett’s annualized return is only around 20%—and you’re fantasizing about earning 100% or more in a year? That’s basically a dream. On top of that, retail investors are especially easy to be led by market news. Not only does the news reach them later than others, they also can’t tell what’s real from what’s fake. Very often, the messages are released specifically to lure retail investors into taking the “knife.”

Lack of psychological preparation is also a big problem. When stocks are rising, they’re extremely happy; but when they drop a little, they immediately fall apart and feel like crying. If you can’t control your emotions well, your investment decisions get driven by your mood. Even though you clearly can’t bear the risk, you still chase at higher prices, and even good stocks get treated like trash and sold carelessly. There’s also a very interesting phenomenon called “loss aversion,” which means people are far more sensitive to losses than to gains. So even if you’re holding stocks that should make you a lot of money, because the pain caused by short-term fluctuations is too much, you end up not being able to hold on—you sell anyway, and as a result, you miss the real upswing.

Frequent switching of stocks is another common trap. You may have clearly done your homework and chosen the stocks you believe in, but because they rise slowly, you can’t stand waiting and you rush into short-term trades. The result is that you get trapped in the short term, and you exit with considerable losses. Then you don’t even dare to buy the stocks you researched anymore—you can only watch helplessly as they keep going up. Another issue is going all-in without knowing how to take a break and let things breathe. When a bear market arrives, for more than 90% of stocks there’s no chance to make a profit, yet many people just refuse to rest. After they get trapped, they become mentally exhausted. When a rebound comes, they end up not daring to make a move.

So what do you do if you’ve already lost money on your stocks? First, you need to check whether there’s technical support for continuing to hold. If technical analysis shows the price can’t rebound, then you should cut losses and exit decisively, rather than keep expanding the losses. If there’s still hope, you can reduce your position, but you don’t necessarily have to sell everything; at the same time, you should reconsider the risk-reward ratio—that is, the ratio between potential returns and potential risk.

If you’re losing money continuously and your trading frequency is very high, then you need to examine whether your investment strategy and technical analysis are truly suitable for you. Sometimes it’s not that the stocks are bad—it’s that you chose the wrong strategy. The most important thing is to stay rational. When you’re making money, don’t get too self-satisfied, and when you’re losing money, stay calm, observe, and wait for changes.

Based on your own risk tolerance, you can consider different investment strategies. Dividend stock investing is buying stocks whose prices are below their value and whose dividend policies are good, then holding them long-term for 10 to 20 years and only collecting dividends. A more general investment strategy is to pursue swing-trading income: you estimate the expected range of stock price increases and decreases, and when it reaches the point, you sell; if the price falls within your expectations, you add more. Short-term speculation is suitable for people who react quickly and can tolerate high-frequency trading, but it carries the highest risk.

To reduce the risk of losing money on stocks, you can consider index funds. They can automatically screen for high-quality companies, dynamically adjust the constituent stocks, and over the long term tend to deliver relatively stable returns. Another method is using hedging strategies when trading to reduce losses—for example, opening positions in the opposite direction to hedge risk.

Also learn how to recognize signs of a stock-market crash. If the index breaks below the 250-day moving average, it may mean the market is shifting from a bull market to a bear market. If the index repeatedly fluctuates within the same range in the same period and can’t make new highs for a long time, you should be wary of a large-scale adjustment. You should also pay attention to the performance of major constituent stocks: if the top 10 important constituent stocks don’t move consistently with the index, the index may fall. When both the index and the VIX index rise sharply at the same time, it indicates that investors are especially optimistic—but once you find that reality differs from expectations, they will immediately sell stocks, leading to a crash.

In the end, retail investors lose money mainly not because of a lack of professional knowledge, but more often because they’re beaten by their own psychology and human weaknesses. If you want to make money in the stock market, you need to do your best to avoid these traps. And if losses really do happen, don’t panic too much—adjust your position in time, and there’s still a chance to turn things around.