Last Updated on June 19, 2022 by Quantified Trading
Only a few people succeed at trading, and those who do, take a long time to learn their craft. As with every other profession, it takes time to understand the different elements of trading. Yet, many people think trading is easy. Why is that?
People think trading is easy because of the thrills that come with short-term profits. Of course, trading definitely holds the promise of high returns within a short period, so people think it’s a get-rich-quick scheme. The desire to get rich with little work and the thrill that comes from the fast-paced trading environment makes people want to become traders, thinking it’s all about clicking the buy and sell buttons. But in reality, trading is the hardest way to make money.
In this post, we will discuss the following:
- What people think of trading
- The reality of trading
- Reason people fail in trading
- Trading vs. investing
- Skills required to succeed in trading
- What you must do if you want to become a successful trader
What people think of trading
People think trading is easy. Of course, looking at a price chart of a stock, foreign currency pair, or futures contract and seeing the big price moves, it seems like making money should be pretty easy. Past price action has a way of making the market movements not-so-random.
Aspiring traders often focus their attention on the big moves and think that if they get in at the beginning of the move, they could have made a fortune. After all, it’s just about clicking the buy or sell button, and boom, the trade is in profit — virtually printing money.
Of course, the thrills that come with such quick profits can make anyone think that making money from trading is easy. Greed sets in and they would start calculating what they can make in a week or month, without considering the possibility of losses. The promise of high returns within a short period makes people think it’s a get-rich-quick scheme.
The truth is that many aspiring traders want to become traders because of the desire to get rich with little work and the thrill that comes from the fast-paced trading environment. What they don’t know is that while trading can provide significant income to those who have learned how to go about it, it requires time to master the skills.
They don’t want to think about the required amounts of time necessary for learning and practicing to gain enough experience to become consistently profitable with their trades. Learning is boring, and not many people want to do boring things, until reality sets in.
The reality of trading
Contrary to what most people think, trading is probably the toughest way to make money. Most traders don’t make money from the market, and many more are highly likely to lose their trading deposits in a single year. In fact, as a new trader, you stand a 90% chance of losing everything.
The market ecosystem is like an ocean, with predators and prey. The institutional traders and big boys are the whales (predators) feeding on the prey. Unfortunately, most retail traders become the prey, and with your little trading capital, you are more likely to become the prey, instead of the predator.
Trading is a zero-sum game. You are either eating or being eaten. To even survive and preserve your capital is very difficult. There is a saying that over 90% of retail traders lose their money within a year. In fact, only 1% are likely to make money. The reason is that only a few can master the necessary skills for making money in the market.
There are many different factors are at play in trading: understanding the ebb and flow in the market, finding an edge, creating a trading system based on the edge, managing risks, and mastering your emotions. It takes time to master all these factors. But trading without mastering them is like flying an airplane without knowing the weather situation or understanding the language of the air traffic control team — a crash is inevitable!
Reason people fail in trading
There are many reasons why people fail to make money in trading, but these are the most common ones:
- Not understanding the market: Many traders jump into the market without understanding the market ecosystem and its players, when it is safe to hunt, and when to stay away. Without understanding the ebbs and flow of the market, retail traders easily become prey for the whales.
- Trading without an edge: Most retail traders don’t have a quantified edge before starting to trade. They just trade what they feel would work, without knowing whether it even has a high odds of making profits over the long term.
- Being in a hurry to make money: Many people come to the financial markets to make quick money. In a bid to make huge money over a short time, they trade with too much leverage and end up blowing their trading account.
- Not understanding their risk tolerance: Most traders don’t understand their risk tolerance. They don’t know the amount of risk their mind can handle — how much they can lose without losing their heads. When they eventually encounter losses, which is inevitable, they end up acting irrationally, sabotaging themselves, or even getting suicidal.
- Not having a trading plan: Many new traders don’t have a plan — both a strategic plan for their trading journey and a specific plan for individual trades. Without a plan, they are tossed around by the market until they lose it all.
- Poor trading psychology: Amateur retail traders tend to focus on the outcome of individual trades, which does not make sense. No one trade can determine the profitability of a trading system. By focusing on the outcome, instead of the process, they confuse themselves and end up throwing away a good system and sticking with a bad one.
- Lacking patience: With their get-rich-quick attitude, retail traders often don’t have the patience to learn how to succeed in trading.
Skills required to succeed in trading
These are some of the skills that can help you succeed in trading:
- Always seeking to understand the market: The market is like an ocean. You must always seek to understand the ecosystem of the market you want to trade: its players, when it is safe to hunt, and when to stay away. If not, you would become easy prey for the whales.
- Finding an edge before any other thing: The first thing before you ever commit your money to any market is to find an edge in that market. An edge is a fairly consistent anomaly you can exploit. When you have an edge, you build a strategy around that edge.
- Managing risks: You should know how to manage risks and protect yourself from losses. The use of a stop loss is necessary, and so is managing your position sizes. You should also know when to take a break from trading to avoid overtrading or revenge trading.
- Never in a hurry to make money: Trading is a process. The money will come over time when you have mastered the process. Seek to master the process, not just to make quick money.
- Having a trading plan: You need to plan both your trading career and how to manage individual trades. A trading plan gives you direction at every step of the way.
- Developing the mindset of a trader: A real trader knows that trading is a game of odds. Your success is a function of the total outcomes of all trades, and not of each trade. With this mindset, you only need to have a quantified strategy and apply it over several trades, without bothering about the outcome of each trade.
- Always keep learning and adapting to the market: Market conditions change from time to time. To succeed in trading, you must always be a student of the market, learning and adapting your trading system to suit the current market condition. Alternatively, you can deploy many uncorrelated strategies so that in any market condition, the most suitable ones will be making you money.
What you must do if you want to become a successful trader
There is only one thing you can do to become a successful trade: take your time to gain the necessary knowledge. Trading is just like any specialized profession. So, to become a great trader, you must have passion for it and put in the time and effort to learn the skills, as you would do for any other skill-based profession.
For example, if you want to be a pilot, you attend aviation school and learn for 5 years. To be a lawyer, you get a law degree after 5 years of learning. In the same way, if you want to be a boxer, you train and practice for 4/5 years. What makes you think that if you want to become a trader you can start tomorrow and become successful.
If you want to succeed in trading, seek knowledge first. Enroll in a trading school or subscribe to a trading signal that explains how they arrive at the signal. Get a mentor to guide you.