Are you thinking of getting started in trading and investing? Before you even thinking about risking your hard-earned money, well before you look at a chart or think about strategy, it is critical to understand what it really takes to become a consistently profitable trader/investor. In my opinion, if one does not prepare themselves properly, they really are decreasing their odds for success well before they even click a buy or sell button. It is critical for every new trader or self – directed investor to fully understand the disciplines required and, more importantly, why they are required, right at the very start. In this piece, I am going to share the four key areas to focus on which will not only help you determine if self – directed trading/investing is right for you, but also hopefully help you to achieve your goals.
Learn the Right Way
Education is where the journey starts and, unfortunately for many, this is where it ends as well. Most people say education is the answer when it comes to successful trading and investing in the financial markets, I completely disagree.
Education is really why most people lose money and fail, because most financial education is either very flawed or intentionally misleading. Proper education is the answer, and without it you are likely to quickly find yourself time and time again on the wrong side of the market with your hard-earned money being transferred into someone else’s account.
Many new traders forget that trading is a skill which needs to be honed and developed. It is a venture that requires superior skill and understanding as it is competition at its finest. Each and every time you push the button to place a trade, there is someone on the other side of that trade trying to take your money. The trader who is more informed and properly educated is typically going to come out ahead.
In short, most trading and investing education leads to buying high and selling low. The proper way to do it is the opposite, buy low and sell high. I know your thinking, who would buy high and sell low? However, that’s what most people end up doing and it’s the single biggest reason most traders lose money and most investors never come close to achieving their financial goals.
The numbers and facts don’t lie, yet many choose to ignore this reality and think that things will be different for them. The alluring thing about the market is that it tempts the newcomer with dreams of easy money and wealth, and with humans being the emotional creatures we are, these temptations usually end in frustration and far less money than you started with.
One of the many pitfalls of trading today is that it is easily accessible and anyone can get online and open an account in a matter of minutes. Does this mean then that we should take this route? It’s almost like believing anyone could perform open-heart surgery after reading a book about it… not likely. So, while I am certainly not pushing you to trade or invest on your own, if you do, make sure you really understand what you’re doing before you get started.
Once you have received the right education, you now have the tools you need; but this doesn’t mean it’s smooth-sailing from the very start? A sound trading plan needs to be adhered to from the very start and the rules have to be in place. As a trader gains more experience in the markets, they will no doubt develop their skills to new levels, but from the very start the rules need to be set. It takes discipline to adhere to profit targets and stop losses, to know why you are buying or selling and to repeat the process over and over again.
In fact, trading actually becomes quite boring after a while, not unlike other actions where the goal is to attain more money. The difference with trading is that it takes up far less time than most other endeavors, if you do it right. Once again, like in anything else, there are ways to do it right and many ways not to.
One of the many traps I have seen new traders fall into is changing a solid strategy for the wrong reasons. Sometimes, when a new trader finds success with some consistent winning trades early on everything is great. Then, they lose a little money, leading the trader to then abandon the strategy in search of another with a higher rate of success. This is a dangerous approach as it can lead to a game of holy-grail chasing which often ends with further frustration for the new market speculator. If you can have the discipline to accept that no one strategy will be 100% perfect and stick to your rules over a sustained period of time, then and only then will you have a chance at sustained success. After all, following a set of rules shouldn’t be that hard, yet I see this as a challenge and potential pitfall for the new market speculator.
It would be great if proper education and discipline were enough, but I am afraid not. Patience is a key piece to the trading puzzle and it comes in two forms. First, you need to have the patience to let the market come to you. Meaning, your rule-based strategy identifies the low risk, high reward, and high probability trading opportunities in the market. It tells you exactly at what price to enter and exit the market. So, you will find yourself waiting for market prices to come to your key entry and exit prices and that can take time. People, in general, like to be doing things and taking action, not waiting. This is in direct conflict with success in the trading world. You must have the patience to wait for market prices to come to your pre-determined entry and exit points. Second, once you’re in a trade, you must have the patience to let the trade work out as planned, win or lose. I have seen so many new traders enter a trade as planned, only to cut the profit short and/or remove a stop loss order from the market because they didn’t want to take a loss. This is account suicide.
Truth is, there are not many ways to make money in the markets. You buy low and sell high, period. This means having a strategy that helps you identify market turns and market moves in advance, with a very high degree of accuracy. Knowing that the only thing that causes market prices to turn and move is significant demand and supply, your strategy must do a very good job of objectively quantifying demand and supply in any and all markets. This needs to be the foundation of your strategy whether it is for short term income or long-term wealth. Knowing what the picture of real bank demand and supply looks like on a price chart is key.
As I said earlier, if I suspect a new student clearly doesn’t understand one of these four key items above or dismisses them as not important, I encourage them to not get involved in the markets. Think of the skill to fly an aircraft and the discipline needed to follow your plan. You first go to school to learn the rules and develop the skill, all while training with someone for a while who is already an experienced pilot. This takes time and the highest amount of discipline as following rules is a matter of life and death. While losing money in the market is not life or death, the key personal traits needed when speculating in markets is not all that different.