Money, Cash & Finance

Undeniably, the most important tip anyone can give you when learning to trade, is that you should never entertain the idea that trading is the same as investing.

Unfortunately, a large percentage of people first discover trading via the stock markets and as a result, they associate trading with investing and therefore don’t get in the right trading psycology.

Admittedly, trading can in a sense be compared to investing simply because one is putting money at risk in the hope of good returns. Of course, just because you’re willing to risk loosing your money does not necessary mean you’re investing though.

Perhaps a more accurate assessment would be to compare trading to gambling as they have much in common such as:

• Plenty of action and rarely a dull moment.

• Fast pace.

• Probability. This is the equivalent to what gamblers call “odds”.

• Uncertainties such as political or market related influences. With gambling these would be the cards, dice and other players.

• Just as you get high stake games, you also have high stake trades.

• Distorted reasoning resulting from uncontrolled emotions.

• Just as gamblers want to beat the house, so too do traders want to beat the markets.

• The majority of traders and gamblers loose more money than they make.

• Wagers are always present.

So, trading isn’t wagering?

Let me remind you about “Trading Places”; a movie starring Eddie Murphy. In the movie Eddie was recruited to operate a brokerage and when the owners explained how the commodity markets work, Eddie replied, “You’re bookies”

Almost immediately, Eddie is able to offer quality trading advice. Of course this has nothing to do with his understanding of the markets, but rather because he’s a master of betting. Accept the fact that trading is betting and you’ll be taking the best possible approach.

Rather than getting into investments, you’re getting yourself into a betting game. Essentially, each time you buy or sell, you’re betting that the markets will behave in one way or another while someone else may be betting the exact opposite.

I should of course mention that there’s one major difference between Las Vegas casinos and trading. In a casino when you make a bad bet, you’re simply stuck with it. On the other hand, if you make a bad trade, you can for the most part get out of it simply by making a different one. Because of the sheer number of people involved in trading, one can almost always find someone to take the bait, particularly between those who are new to the game.

Of course in certain markets they may not be much activity, so there’s always a chance that you won’t get a break to get out of a bad trade.

The hardest part of trading is being able to remain level headed and to stick to the system you’re using. As such, we can confidently say that trading is essentially a game of self control and good discipline.

The hidden trap within trading, as I’ve mentioned already, lies in the fact that people compare it to investments and the safety factor which goes with investing. Realistically though, trading is betting and in fact, it’s like being in a room with millions of other bettors.

Strangely enough, very few people would be willing to try and earn a living from gambling and yet there are literally millions who think they can make a living instantly with trading. Please believe me when I say it simply doesn’t work like that.

Just remember, you get gamblers and you get professional gamblers. Likewise, you get professional traders, and you get those who are simply wishing for the impossible.

Let’s see how the dictionaries define gambling:

1) To become engaged in hazardous or reckless behaviour

2) To expose oneself to risk or hazards

3) An act or undertaking which has an uncertain outcome

Now let’s see how “calculated” is defined:

1) Determined by mathematical calculation

2) Undertaken after careful estimation of the likely outcome

3) Made to accomplish a certain purpose; deliberate

Lastly, let’s take a look at how “risk” is defined:

1) Possibility of hard, loss or danger

2) An action which involves an uncertain danger

3) The variations in returns on investments

4) Possibility of unpaid debts

Professional traders don’t go with gut feelings but instead, they stick to the rules of their systems. They take risks but they’re calculated risks and the closely monitored. Professional traders aim to be ahead at the close of each month.

The plain and simple truth is, traders aren’t gamblers. Yes they are also faced with many uncertainties but unlike gamblers, the outcome for traders is not uncertain. They have their systems and they know the markets. Above all, they know that they either enter a trade well prepared, or they face heavy losses.

Whether it’s with gambling or whether it’s in trading, gamblers very rarely follow a set plan or system. Likewise, they fail to manage their finances accordingly just as they fail to calculate risk. The bottom line is, they simply cannot help themselves from being caught up in the excitement.

The last tip in this article is that as a trader you need to focus on taking calculated risks with the sole intention of generating consistent trading profits. Of course this is a far cry from the way in which gamblers operate, given the gamble more for thrills than anything else.

A lot of folks who plan on having a winning trading career wind up losing money. This is in spite of the presence of many reliable share trading education businesses, the availability of numerous trading books providing investment tips, and the occurrence of sound trading rules which have withstood the test of time. These rules are not covert-nearly any book will reference at least some of them. But even with all this, countless individuals still find it hard to attain trade profits in the long term.

What is the notable difference between those traders who succeed at this activity and those whose efforts end in failure? Experts in the field will tell you that it is all a matter of psychological differences. What this boils down to is that you have to be able to deal sensibly with both winning and losing, with downs as well as ups. You must be able to cope well with managing your risks and not let greed get the best of you. These are all elements of what is referred to as trading psychology. Many columns and volumes have been penned on this topic, so we will not go on further about it with the exception of one important area.

Of all the stock investment advice I have ever understood, the most crucial can be explained like this… Something that a lot of folks struggle to conquer is their anticipations in terms of trading. Excessive numbers of people possess expectations that aren’t grounded in reality, thinking they’ll earn massive trading profits as a rule, for instance.

Having high expectations of yourself is a good thing however, unrealistic expectations is not. Many traders when presented with the wonderful opportunities that the market offers to achieve successful trading results, can be very easily led to setting unrealistic goals for their trading. This can be devastating.

When one ventures out into gatherings of traders, it is amusing to listen to those who claim anything less than doubling or tripling their cash is not worth their time or effort.  These foolhardy individuals will not even listen to the rock solid plan that can guarantee a 25 – 35% annual return on investment.

Sadly for such individuals, they do not have truly realistic expectations. Sometimes they will lose on several consecutive investments and they simply will not be able to get back up, dust themselves off, and start all over again. Due to their inflated expectations, once they’ve lost a bit of their money they’ll begin to make trades that are far too risky in hopes of rapidly recouping what they have lost and achieving their unrealistic aims.

An additional dilemma that some traders face is that even when their goals are a more realistic 20% annually, for instance, they think they will attain that return in only the first few weeks instead of taking a longer term look over the 12 months. Twenty percent annually is merely a bit more than 1.5% monthly but some traders might anticipate attaining that rapidly and might espouse some of the bad habits like the ones described previously.

Ray has found that a winning approach is only one component of trading success. In addition, traders need skills in market profiling and money management. They need to master the psychology of trading success by understanding what motivates them and coming to terms with what scares them.