I once heard hedge fund billionaire Ray Dalio gave a talk on TED. Despite his success, he said that making money in the stock market is not easy at all. When he was a kid, he made money being a golf caddie earning $5 a bag. He took the money that he made from the job and invested it in a stock. The first stock he bought was North East Airlines because that was the only stock below $5 that he could find. He tripled his money when the company got took over and he immediately thought that making money in the stock market was an easy game. When he grew up, he started his own fund and proceeded to be a success.
He was so confident of his own abilities and became quite arrogant. Dalio correctly predicted in the 1980s that banks had lend too much money to emerging market countries and that they will not be able to pay it back. Mexico defaulted at that time and along came the crisis. Because he correctly predicted the crisis, he was invited to testify in front of the U.S Congress. He also appeared on the show Wall Street Week.
Despite the crisis, the stock market continued to rise higher and Ray Dalio lost so much money for himself and his investors in Bridgewater that he had to shut down his operations. It became so bad that he had to borrow $4000 from his dad to pay for family expenses.
The billionaire learned his lessons and over the years he realized that making money in the stock market is not easy at all.
You can view the talk that Ray Dalio gave on TED below.
If a successful billionaire hedge fund mogul says that making money in the stock market is not easy, what about the rest of us? Many many great traders have also said that making money in the stock market is not an easy game at all. Let's take a look at the reasons why trading is one of the most difficult profession in the world.
Many new traders jump into trading thinking that it is easy to make money. Most are usually captivated by the lure of advertisements telling them how easy it is to make money by taking some signals and spending only 30 minutes a day monitoring the market.
The truth is, learning about trading is not as easy as attending a seminar and taking a book and reading it. Trading is a highly skilled profession similar to a lawyer, a doctor or an engineer. It takes about 3-5 years to get a degree in these professions. After that, the student still need to gain experience for a few years before knowing the ins and out of the profession. It is only after 5 years that the new professional will be able to produce some good results.
Trading is not different from professions such as being a lawyer. It takes time to learn about the different knowledge in the art of trading and investing. Students need to learn about things such as:
It sounds very easy from what the advertisements tell you. But the reality of trading is it is much tougher than you think. It takes time to learn about the different concepts. It takes time to master the different concepts. It also takes time to transition from textbook knowledge to trading with real money.
Never ever think that mastery of trading is easy.
It is very very difficult. I always like to say that "The stock market is one of the most difficult places to make easy money".
One of the reasons why the stock market is one of the most difficult places to make easy money is because we are very attached to our money. We all know how hard it is to make money using physical labor. A person might make $10 an hour working from day to night, 6 days a week. He or she can earn $500 a week.
In the stock market, you can lose $500 in a single hour.
When you have worked so hard to make that money and lose it all in a single hour, it can be a very very painful experience. There are so many people who have labored all their lives making and saving $300,000 to invest in the stock market. They choose a few stocks and start to trade them. Within a few months, they lose $150,000 of their hard earned money.
Imagine what an awful experience it can be.
Some traders feel so bad at losing that amount of money and they start to play catch up. When the stock goes down more, they start to buy more of the stock in the hopes that they can recoup their losses if the stock goes back up. Without realizing it, their remaining $150,000 turns into $50,000 the next week.
When you are not thinking straight because of emotional pains, you tend to make more and more silly mistakes. Mistakes in the stock market is very very costly. Those who cannot control their emotions will never be able to succeed in the market. Some of the best traders out there go through periods of losses but they will never allow their emotions to make them go against their trading or investing blueprint.
One of the things that new traders cannot understand is that professional traders can make money in the market even if they are correct 60% of the time. If you are correct 60 times out of 100 times, you will make money in the long run. It is painful each time you lose. But since the wins are more than the losses, the trader will come out on top in the long run.
If you are a business owner who has 100 employees, you can tell them what to do and they will follow your commands. A king can have his army around him and tell them where to go and what to do. A rich person can use money to buy the services of talented people and thus have control over a situation or project.
When it comes to the stock market, even the richest and most powerful individual cannot control the direction of the market. If a stock crashes, the rich person might be able to shore up the stock for a period of time by buying the stock. But if the stock is a lousy company, no matter how much you buy the stock, it will eventually go where it wants to go.
If it is so difficult to control the price direction of a single company, how much more difficult it is to make the entire market go where you want it to go. Imagine trying to stop the market from crashing in 2008. You will just be throwing off good money trying to buy every stock in the world to keep it from dropping.
That is one of the reasons why smart people lose money in the stock market.
Their experience tells them they can control their own professional lives but the stock market is greater than a single person. It will always go where it wants to go. If you have no respect for it you will be swallowed by it.
Traders can only react to what the stock market gives us. We do not try to control it or predict it. If the stock market is in an uptrend, we want to be long the market and buy the dips. If the market is in a downtrend, we want to stay away from the market or learn to short the market.
By reacting to what the market gives us, we will be going with the flow of the market rather than against it.
When it comes to trading, only a trader that has a clear strategy with defined rules will be able to succeed in the market in the long term. The stock market is a very unforgiving creature. Just like a basketball game, there are a set of rules that one needs to follow in the market.
As the trader gains knowledge and experience in the market, you will start to notice what works and what does not work. You want to avoid things that do not work and follow the things that work. Reading books, listening to other traders and self discovery will enable you come up with a set of rules to follow:
For example, here are some rules that traders can follow:
Other more specific rules that revolve around a strategy can include:
Different traders will have different rules which they need to craft to their own circumstances and personality. You can find a template from another trader and learn from it. But ultimately, it is best to come up with your own trading rules.
Having a set of rules is not enough.
It is the ability of the trader to continue to follow his or her trading rules during good times and also bad times that will make the trader stand out from the crowd. There will always be periods of great gains and there will be periods of losses. The trader must trust his system and trading rules and never deviate from it.
One of the difference between a successful trader and a losing trader is the ability to stick to trading rules in all situations. Some traders don't even have any rules to follow. Thus, it is not surprising at all that they blow up their account.
With the emergence of modern technology and instantaneous communication, there is too much distractions in the market place. Everybody can be a guru and stock expert nowadays. From websites, to crowd wisdom to stock chat groups that cater to different trading strategies, the internet has been a big distraction to quality personal analysis.
So many channels and websites continue to tout the next great stock that will double or triple within the next nano second. If you were to go through all of it, it would seem that there are 100 stocks that will double by tomorrow. There are of course some good places to find analysis and different views and opinions. Learn to choose good ones and weed out the distractions.
The important thing to remember is this:
The best money manager in the world is you. Only you will know what trading strategies fit you. If you follow tips from others you will not have the personal conviction that is needed to follow things through.
93% of people who dabble in the stock market will lose money.
Which means that 93% of people who make calls and decisions in the stock market will be wrong most of the time. The crowd is always right in the middle but wrong at both ends. Have you ever noticed that?
When a stock has bottomed, the public is still skeptical of the stock and refuses to buy it. When the stock is dropping and dropping, the public will always want to buy more of it until it drops even further and scares all of them. They sell all of it and the next week when the stock bottoms and rebounds they are no longer in the stock. When a stock is almost near the top, that is when the public and gurus are so interested in the stock.
All these are common things that go on in the market every single day. They only come in different variations. The summary is this:
The crowd is always wrong at important turning points.
Because the majority is always wrong, it takes courage to go against the crowd. When everybody is fearful, it sounds stupid to sound optimistic. That is human nature. When everybody is optimistic, it sounds stupid to be bearish.
The trader who does his or her homework very well will be able to have the conviction and courage to buy when a stock is bottoming. He or she will also have the discipline to sell when things get a bit toppy. Easier said than done but that is what the 7% does that the other 93% will never do.
Advertisement says: Only 30 minutes a week, easy to understand kids also can do it!
That is exactly what I have read in an ad.
Another one goes like this:
"No need to make decisions, just copy and trade".
A lot of people do not think that trading requires a lot of hard work. Just put in a trade and hope it goes up and triple your money. It does not work like that. Learning the technical concepts and skills takes time. Analyzing the markets and stocks also requires lots of hard work. Just like any other profession, it takes lots of hard work at first.
It is only after 10-20 years of hard work that the boss in your company can come to office at 11 am, eat lunch at 12 pm and go to the golf club at 3 pm. You have never seen the sweat and tears put in during those early years and people have the courage to say that the boss is "lucky".
The reality is trading takes a lot of hard work at the beginning.
Everything is hard at first but it will get easier with time.
Don't let this hard reality scare you. If you really want something, persevere and work at it. If you are able to rake profits out of the markets consistently, it will open up a whole new world to you that you have never known. The freedom to trade anywhere, the freedom to answer to no boss, the freedom to do anything you want in your own way and time. Who knows, you might even be able to pursue the dream (like traveling the world) that you have always wanted when you were a kid.
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