My guess is that you are interested in trading because you want to break out of your 9 to 6 work routine. Or you want to have another source of income and earn more. Be that as it may, trading gives hope. Hope that you can become financially independent and better provide for the needs of your family.
However, hope alone is not enough if you don't know what you're dealing with. Are you ready to learn the whole truth about trading? Can you make trading work for you and succeed in it?
Trading is a get-rich-quick scheme
For many, this statement will not be entirely pleasant, but it must be said: Trading is a get-rich-quick scheme.
You might argue that you've heard of traders who started trading with small accounts and were able to achieve seven figures on their balance sheet. It could be so, but the chances are negligible here. And that's why. The only way to make a huge amount of money quickly is to take on too many risks. Only if you are incredibly lucky can you earn a lot of money.
However, 99.99% of traders who try to do this will simply lose their deposit. Only a few lucky ones will be able to earn at least some decent amount. And it's not about skill, but only about luck.
Hear what Warren Buffett has to say about his wealth:
My wealth came from a combination of living in America, lucky genes and compound interest.
The key word here is compound interest. In other words, Warren Buffett became the richest investor in the world because he was the best at what he did and he gradually accumulated his profits. This is achieved not in a few weeks or months, but in more than 50 years.
So if you look at trading as a get-rich-quick scheme, you will be disappointed.
Do you need money to make money trading
This is one of the biggest trading myths that has fooled most traders. If you think you need a profitable trading strategy that you can use to make millions of dollars in the market. Now, this is nonsense.
Yes, you can have a profitable strategy, but that doesn't mean you can make millions of dollars. Why? Because the size of your deposit is very important!
I'll give you an example. Let's say you have a trading strategy that brings in 20% per year.
- You have $1,000 in your trading account. So you can earn $200 a year.
- If the amount is $10,000, that would be $2,000 per year.
- If the amount is $1 million, that would be $200,000 per year.
As you can see, your trading strategy is just one part of the equation. Another equally important aspect is the size of your account.
And for the same reason, hedge funds raise millions, if not billions of dollars - they need money to really make money trading.
Trading is one of the worst ways to earn regular income
Many traders start trading because they want another source of income. They want to quit their 9 to 6 job and be free to do what they love. If you too are visited by similar thoughts, then let me warn you. Trading is one of the worst ways to have a steady source of income.
Why? Because markets are always changing! A trading strategy that is profitable this week may stop working next week. This does not mean that you will no longer be able to trade this strategy, but it will take time for market conditions to return in your favor, which may take several weeks or months.
Therefore, you should not expect to make a profit every day, week or month. You can only take what the markets give you, and nothing more.
You are always studying the markets
Here is my learning curve as a trader. I started with indicators , then with price action trading . For several years I thought that this was all I needed to become a profitable trader. But it hurt my height, because I turned off everything else (and limited myself to price action). When I realized my stupidity, I quickly returned to studying the markets.
I asked myself, "What do other successful traders do to profit from the markets?" That's when I came to trend trading , system trading, mean reversion trading, etc.
Today, I trade multiple trading strategies across multiple markets, resulting in a smoother equity curve for my returns.
The lesson is this. You can be a profitable trader, but that doesn't mean your learning curve is over because you should always learn the markets.
The market is always changing
Here is the real story.
From around 2006 to 2012, Nikkei futures were heavily traded by private traders in Singapore. This is because Nikkei is traded on multiple exchanges such as SGX, OSE and CME and this offers arbitrage opportunities.
Let me explain how it works. Suppose you can buy 1 Nikkei contract for $100 on SGX and then quickly sell it on CME for $101 for a $1 risk-free profit.
Now that you are trading a large number of contracts and doing so many times a day, you can earn six figures per day. Many private traders exploited this inefficiency and made good money for several years. Then something happened. Computer algorithms have come into the market to profit from this inefficiency.
As you know, machines are faster than people, the market has become efficient, and the days of "easy money" are over. In the end, most traders were unable to adapt to this and ended up quitting altogether.
So lesson. There are no guarantees in trading. Just because something worked in the past doesn't mean it will continue to work in the future. That is why you must continue to study the markets in order to adapt to ever changing market conditions.
How to become a successful trader if the odds are against you?
At this stage, we realized that trading is not as easy as it seems. So what can you do about it? Here are my suggestions.
Don't reinvent the wheel
You can figure everything out on your own, which will cost you a lot of time and money. The key is to look for trading algorithms that contain specific trading rules with backtesting results. For example, you can buy my trading algorithm .
Don't quit your regular job
If trading is your only source of income, you are putting yourself at a psychological disadvantage. Why? Because you will need to earn money every month. This forces you to make bad trading decisions such as widening your stop loss , averaging out losing trades, trading too often.
This is why many professional traders do not rely on trading as their sole source of income.
For example, some traders are engaged in training other traders. Most hedge funds charge a management fee every year, even if it's a losing year. If you manage a billion dollar hedge fund and receive a 2% management fee, that means you are guaranteed $20 million a year.
As you can see, professional traders and hedge funds structure their trading in such a way that it is not their only source of income. This means that if you have a job, you have a constant source of income every month, no matter what. This allows you to focus on trading without having to worry about whether you can pay your bills this month or not.
Dive into the ninth wonder of the world
Albert Einstein once said, "Compound interest is the eighth wonder of the world." But I'm going to go ahead and introduce you to the 9th wonder of the world. So what is it? This is a regular addition of funds and an increase in your profits.
If you are earning an average of 20% per year with a $5,000 account, it will turn into $191,688 in 20 years. Not so bad.
But what if you add another $5,000 to your account every year and increase your profits? In 20 years it will be equal to $1,311,816. See how powerful it is?
Summing up
So here's what you learned today:
- Trading is a get-rich-quick scheme. If someone promises you a "quick profit", run away from such advisers.
- The best trading strategy won't make you a dime if you have zero capital - you need money to make money trading.
- The market is constantly changing, which makes it one of the worst ways to generate regular income from trading. If you want a stable income, find a stable job or additional sources of income, and do not just trade.
- No matter how much money you have made, you should always study the markets.
- If you want to be a successful trader: 1) Follow what works 2) Don't quit your regular job 3) Keep adding money to your trading account.