Do you have what it takes to be a trader?
Better yet, are you sure you want to be a trader?
Actively trading public markets, and consistently profiting, is extremely difficult.
The stock market is dominated by sophisticated players, with access to information, computational power, and speed far greater than any of us small retail guys will ever have at our disposal.
There are hundreds of billions of dollars traded every single day across US stock markets alone.
It makes sense that this type of liquidity and size marketplace is going to bring out the best and brightest competition to fight for their piece of the daily pie.
Does that mean there’s no way for the retail trader to make money? Not at all.
Can the retail trader even win in a big way? Sure.
But achieving either of those milestones is not guaranteed, and it’s going to take a lot of time and concentrated effort with many periods of ups and downs to get there.
The truth is most people do not possess the skills required, or the patience or discipline needed, to achieve and maintain profitability.
Trading is a business, and running a business is hard
Part of the illusion that trading is easy to the newcomer is the zero barriers to enter into the business. Anyone can wire over a few hundred dollars, fill out some forms, and begin trading in just a couple of days without any prior knowledge or education needed.
That’s a very dangerous situation, but history suggests that’s exactly how most people start. In fact, it was for me.
What the new trader fails to realize is that just like any other business venture, there needs to be a long period of research and planning that takes place before jumping in head first.
Conventional business plans like operations, marketing, and customer relations don’t apply to trading. However, there are a very different set of considerations and skills that are necessary and we’ll cover them in the next section.
What’s important to remember is that just because you’ve studied finance in school or have rolled the dice on a few good trades along the way, it doesn’t mean you’re ready to tackle markets on a daily basis.
Skills for long-term trading success
There are 3 high-level skills you’ll need if you want to succeed as a trader.
- Learn to respect and manage risk before you lose all of your money. This requires both emotional control and a firm understanding of the uncertainty of markets and probabilities of trading.
- Recognize and control the impact your emotions have on your trading. Humans are not naturally good traders, in fact just the opposite. The most comfortable decisions are usually the wrong ones, and we’re hardwired to make decisions that feel good (or cause us to panic at exactly the wrong times). Gaining screen time to recognize and reverse these tendencies is necessary and typically takes a while.
- Develop a unique trading strategy. What edge do you have that few people already know about or are doing? This one is tricky and requires you to balance conviction to stick with a strategy, but also flexibility to adjust and throw ideas away when they’re not working.
We could easily break each of those down into more common pitfalls and lessons to learn, but the above 3 buckets are the broad strokes.
For new traders, it’s all about absorbing as must knowledge as you can: definitions, strategies, market structure, etc.. And that’s the easy part.
The next step will be gaining screen time (experience). Getting comfortable taking losses, dealing with uncertainty, and finally, developing or finding a trading strategy that you are comfortable with.
So ask yourself, are you willing (and able) to spend a full year learning and studying markets while losing money? How about 2 years? 5 years?
Once again, throughout this period, there are no guarantees you will achieve the level of success you’re looking for.
Tips for making trading work
If you’re still crazy enough to battle some of the smartest and relentless people and firms on the planet, then here are some suggestions I have:
- The shorter your trading time-frame the more competition you face. Make things a little easier on yourself and extend your time-frame.
- The luxury of being able to sit on your hands is an edge. Professional money managers get paid to perform and they’re expected to do that each and every quarter. The retail trader doesn’t have to answer to anyone, and therefore has the benefit of time on their hands to wait for the very best setups.
- Use your small size to your advantage by trading lower volume issues, and entering and exiting markets as you please, in one single execution. Being nimble is an edge.
And trading doesn’t have to just be transactional. You will be more successful if it’s relational and collaborative. Find people or a mentor that you relate to and absorb as much knowledge as possible.
That could mean curating a list of experienced traders on Stocktwits or Twitter, or it could mean paying for a trading mentor or service.
I would strongly advise against buying expensive educational courses because there are too many great sources of free trading information and strategies you can learn from.
Mentors (trading services), on the other hand, can be worth their weight in gold, if they’re the real deal and share their decision-making process in real-time and on a daily basis. The ability to ask questions to someone with years of experience on a trading style that you’re interested in will save you time and accelerate your learning curve.
Not everyone should trade, but everyone should invest
For reasons discussed already, not everyone should, or is cut out to trade. And that’s perfectly okay.
Not everyone needs to run their own business either.
But everyone should be putting some cash away and investing for the long term.
Dollar-cost average into index funds for retirement or pay a professional advisor to create a plan around your specific financial goals and time horizon.
Stocks as an asset class, over the long term, have proven to be one of the best wealth creators that you don’t want to miss out on.
So… do you have what it takes to be a trader?
Trading, on the surface, seems like an easy thing to do.
Anyone can open up a Scottrade account, throw some darts, get lucky, and think they’re a genius.
But make no mistake, waking up every day to battle the market requires a serious commitment of time, capital, and energy.
For most people, it’s not a fit, whether it be because of personality, the time required to get over the learning curve, or simply capital.
But if you understand the journey ahead of you and are willing to put in the work, then you’re on the right path to becoming a consistently profitable trader.
Good luck out there.
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