The illusion of trading: How to avoid the trap
Earning money by trading is an illusion for many people.
There’s a statistic in the markets that’s held true for many years: 90% of the people that come into the markets lose their money in the first six months.
Our desire for this blog post is to save thousands of people from the anguish that is all too often experienced in trading, and that it helps the many good people who enter trading to find the success they desire.
In order to reach this, you’ve got a choice to make: Are you going to turn yourself into a winner or let yourself become a loser?
Intention drives everything.
If you intend to make something happen, it will.
If you don’t have a strong intent, then you’ll get whatever comes your way. And in the markets, the probabilities are that you’ll lose your money unless you set the specific intention to become successful.
Discover the subtle trap of trading and learn how to avoid it.
The illusion of trading: From long term perspective to short term trading
The dream of long term wealth by short term trading
When you first hear about investing in stocks or crypto, and I mean long term investing, not day trading, you are cautioned to do your research before investing your money.
You were also taught or figured it out on your own, that there’s a lot to learn when investing in something.
Be safe and choose wisely, you’re in it for the long term.
Perhaps you did some long term investing, perhaps you did what many do and let your investing consist exclusively of mutual funds and your 401k.
Much safer, simpler and easier to do, no doubt.
Also well within the comfort zone for most.
You start making good profits based on this smooth and slow work.
Well deserved money for your efforts and work.
Somewhere along the way, you heard about the wonderful world of short term trading.
The first impression is usually “Wow!”
Now here’s where the trap is set.
So you decide to find a broker and open an account.
Next, you send in your money to fund your account. All this sounds familiar, right?
So here you are, money in hand with big dreams and high hopes.
You acknowledged the risk, you’ve digested as much information as you can in a short period of time and now you’re ready to place your first trade.
First good opportunity comes along and now you actually get your feet wet:
- You’re excited and you watch that trade, the markets, the news with great anticipation.
- You’re learning more and more as you go, including the fact that there’s a whole lot more to this trading business than you first thought.
A lot more.
But it’s too late. You’re hooked.
Now, it doesn’t really matter what happens on your very first trade. You see the potential and you know the money’s there for the taking.
You are being hooked in a trap by the industry.
It doesn’t take long and you get to experience some of the events that will inevitably occur to new traders:
- you get stopped out, then watch the market run the direction you predicted. But you’re out.
- you hesitate to enter a trade, and either miss out on the trade altogether or you just miss out on the profits.
- you hang onto a trade too long and watch your profits disappear.
- you continue to hang onto a trade until it becomes a large loss.
- you sit on the sidelines and see other markets running, knowing the huge money that’s being made
During this time, you feel the torrent of emotions that come into play: anticipation, excitement, anxiety, greed, fear, regret, anger, blame, elation, shame, so on and so on.
The list is long, and the emotions are powerful, and they just pull you further into the trap.
It doesn’t take too long and you’ve had several trades lose money.
You’re getting frustrated because things aren’t working out like you’d come to expect.
The chart patterns are getting confusing and the indicators you’ve been using have let you down.
You’re looking for other indicators, and the urge to deviate from your system or method is now getting very strong.
You want to find a system or strategy that will give you the edge and allow you to beat the markets.
Please, don’t fall for the trading educators that :
- have built their business around encouraging all and sundry to participate in the wonderful world of trading where profits are generated while you sleep or go fishing with your mates.
- paint a picture of trading as an occupation that requires little work or effort, merely a computer and 10 minutes a day to generate wealth beyond the realms of imagination.
The industry itself has created an illusion that success as a trader is our democratic right.
But in the same time, you’ve got a competitive nature, and you know you’re smart enough.
You want to win!
And… at this point, unless you are a robot or have ice in your veins, the trap has been set and you have been caught.
The illusion of trading: let's dissect the trap.
Here are the components of the subtle (mental) trap of trading.
- Familiarity with what’s being traded.
- The risk disclosures and the tremendous focus of awareness on risk.
- The implied simplicity of trading
- The implied notion that trading is investing
Now let’s look at how these components turn very intelligent and successful people into traders that struggle, make un-wise decisions and lose inordinate amounts of money – willingly.
The false confidence based on familiarity
We’re not afraid of things we’re familiar with.
The familiarity creates a built-in over-confidence regarding our knowledge.
This is false over-confidence.
Just because you’ve bought bitcoin, you know what bitcoin is, doesn’t mean that you know squat about how to trade it in large quantities like thousands of bushels in the markets.
The nature and the complexities involved in profitable trading go way beyond what virtually everyone has experienced in their lives before trading.
This false over-confidence, this fearlessness, results in a catastrophic action: starting off way too far up the learning curve.
If you don’t get it, let me ask you one question: When you started learning maths, where did you start ?
Well, here was your learning curve: counting, addition, subtraction, multiplication, division, fractions, decimals, algebra, trigonometry, calculus, etc.
If your starting point is fractions, and you never got taught the counting, addition, subtraction, multiplication and division, you will struggle…
The role of the industry in the subtle raising of your risk tolerance
I’ve read it in several places and found one thing to be true: often, the most successful traders and investors have a low tolerance for risk.
Take Warren Buffett’s rules for investing:
- Never lose money.
- Never violate rule #1.
The NFA makes it a requirement of all brokers to have all clients acknowledge the high risk involved in trading, and that’s a good thing.
Can’t let people trade and risk money without acknowledging the risks that do exist.
Can’t say you weren’t warned.
But there is an interesting affect of that risk acknowledgement.
It subconsciously raises a person’s risk tolerance.
By actually putting your name to paper that you’re accepting and acknowledging the risk, your tolerance for risk goes up.
Even if you’re nervous when reading the disclosures, your fears of risk are suppressed through your putting your name on paper that you accept the high risk.
Combined with the false over-confidence that comes from the familiarity, the conscious acceptance of the high level of risk has now both consciously and subconsciously prepped and primed the new trader to take large risks, to be “risky”.
The apparent simplicity of trading
The basic premise of futures contracts is very straightforward.
Options are pretty easy to grasp as well.
The act of opening an account, having a broker provide a recommendation based on their strategy and in a market that they monitor, then placing the first trade, is easier than buying your first piece of real estate or assembling a stock portfolio.
For most people, the act of placing trades itself is so simple that it implies simplicity in the business of trading.
Combined with all the gurus out there marketing the heck out of their home- made systems and “Get rich quick” presentations, the whole process is made out to be simple, fast and easy.
This subconsciously reinforces the notion that “I can just jump right in and start making money”, the false over-confidence.
This notion usually precludes any inclinations that more is needed to be learned to be successful.
The belief that trading is investing
Trading is usually associated with the investing world more so than anything else, especially in the mind of the newcomer.
Trading can be called investing in the light that all investments involve putting money in with the anticipation of return and they all involve a certain amount of risk.
But just because a person is involved in activity that includes putting money in with the anticipation of a return and there’s risk involved, that doesn’t make it investing.
Trading is often likened to gambling and for good reason.
There are loads of parallels.
- Here are several, with the gambling jargon in parentheses.
- There’s lot of action and things move fast
- There are probabilities (odds)
- There are numerous uncertainties.
- The emotions involved in high risk trades (high stakes games) require a high level of control
- Clouded thinking from emotions (and/or alcohol) results in big losses
- Everyone wants to beat the markets (or the house)
- There’s big money involved
- Most traders (and gamblers) lose most or all of their money and go home empty-handed
- Wagers are being placed in every transaction
- You’re thinking that trading isn’t wagering? Sure it is.
Where the subtle mental and emotional trap the exists in trading gets people is that the whole activity is presented as a form of investing (which carries the images and connotations of long-term investing), while the truth of the matter is that it is really a game of betting in a room of a thousand other betters.
There’s a huge deflection of the realities of the nature of the activity.
Extremely few people are naïve enough to think that they are going to go to Vegas and make a living gambling, unless you were VERY prepared.
Most know that they’ll go, lose their money and have a good time.
Too many people enter the markets though, thinking that they can just jump right in with virtually no preparation and make money.
Doesn’t work that way.
How not to fall for the trading illusion.
Trading is your new business.
No one is forcing you to trade.
You’re doing this by choice. If you choose to continue to trade, then follow the steps in this blog religiously, so that you can become the good trader that you are capable of becoming.
You’re not playing with Monopoly money.
This is real money. Your real money.
One of the shortest routes to getting a clear picture of what it takes is recognizing that trading is a business. Your business, as soon as you make the choice to trade.
You may have heard of Robert Kyosaki, one of my favorite authors.
He wrote, “Rich Dad, Poor Dad. What the Rich Teach Their Children That The Poor and Middle Class Do Not”. He has a chapter in his second book, “Cashflow Quadrant” entitled “Mind Your Own Business”.
He means that you have assets that produce income and properly managing and attending to them is YOUR business, and that you should treat them as a business.
It doesn’t matter if you have a trading account, mutual funds, real estate or just candies.
That’s your business.
Most people don’t come to the markets with the idea that trading is their business.
They come with a dream of phenomenally high returns on their money, that it’s easy and they’ll be on their way to riches in no time at all.
Many are sold on the idea that trading is easy.
There is no easy money. Stop dreaming.
Unfortunately for most, that is extremely true: It is easy to trade.
Buying or selling a contract is as easy as clicking your mouse a few times.
There are nice long trends that quite a few people got in on, and market turns that many people timed just right and pocketed some tidy profits.
Of course, the market makers and the brokers always make their money and some trades do wind up with both the seller and the buyer coming out at or just below breakeven due to commissions and the bid-ask spread, but generally speaking, every trade results in either the buyer or seller making money.
This is a very encouraging thought.
Now for the reality-check.
On every single trade, though, somebody is losing money.
Generally who the loser is and how big they lose are determined solely by traders themselves. No one gets forced into a trade.
Every trade is entered into willingly, and protecting your trading account is a willing action that you must take.
If you’re on the losing end of a trade, then it’s up to you to keep the loss small.
The winners that you enter require you to actually enter the trade at the right time and under circumstances that allow you to take a profit.
In many respects, trading has similarities to a competition sport.
There’s you and the person on the other end of the trade you enter, one buyer and one seller.
- You’re betting against each other as to what the markets will do.
- You have probabilities that will be against you or the other trader.
- You have related markets that will move in favor of you or your opponent.
Weather, unexpected events, related markets, governments, innovations, crowd mentalities and reactions to news, etc are all factors which can change those probabilities in a matter of minutes.
There are many factors involved in the market price that can work against you, and you need to know what to do when they influence the market and change the probabilities.
In order to be the on the winning end of a trade, you have to first understand where it starts, where it may go, and what to do as things happen.
In other words, trading can be very complex and confusing. It can also be simple taken one bite at a time, and be made understandable and profitable.
Choose to be a successful trader
Becoming a consistently profitable trader presents a somewhat formidable, but reasonable and very worthwhile challenge.
First, you must decide that you are going to invest your time to learn the things you need to know, to train and develop the skills necessary to stay in the game, and most importantly, that you’ll treat this endeavor with respect and not as simply an entertaining hobby.
This is, after-all, your business.
Then, get clear awareness is a critical attribute.
We’re going to get clear on some critical things and then move on to the beginning of the solution.
If you’re going to make some changes, you need to clear the fog and raise your awareness to which weaknesses you need to armor and which strengths you need to build.
The most critical step in any developmental process is that of becoming aware.
- How can you avoid mistakes if you aren’t even aware of them?
- How can you protect yourself if you’re not aware of your own vulnerabilities?
Start with this powerful tool to become successful.
Oh and do it like a pro: swing trade on the daily timeframe.
Don’t lose time and perspective on small timeframes.
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