DEBUNKING THE GREATEST TRADING MYTH

Trading may be one of the greatest professions around. It is a well known fact that successful traders make a very good living, making substantial profits year after year, with no one to answer to, except themselves. They work whenever they choose. They make money very efficiently, without the need for processing raw materials, hiring labour, renting offices, and so on. Money is made directly from money. It is fast, clean and highly efficient. They have the opportunity to travel while they work, or pursue other passions like art, food, sports, and yes, even teach trading, at the same time !

But all this comes at a price:  THE MAJORITY OF NEW TRADERS FAIL WITHIN THE FIRST 3 MONTHS OF TRADING, FOLLOWED BY MOST FAILING WITHIN THE FIRST YEAR OF TRADING. THIS LEAVES ONLY A VERY SELECT GROUP OF TRADERS ACTUALLY SUCCEEDING AS TRADERS AND BEING ABLE TO PURSUE TRADING FOR A LIVING !

I would very much like to dispel the particularly tenacious and recurrent myth whereby trading is portrayed as 'easy money' and that it promises phenomenal success. It is not very hard to come across adverts like this:

  • No Effort Required
  • No Time Required (Only Minutes a Day)
  • No Skills Required 
  • No Understanding Required
  • Very Little Capital Required 

As you well know, the impression portrayed by such adverts never fail to attract people wanting to believe that there is an easy and superfast route to affluence. Unfortunately, nothing could be further from the truth. In fact, you will learn that the markets are designed to cause the greatest harm possible to the trading account, and unless you know how is it done, you may never find out why you keep losing, over and over again, even after doing all that you were ideally supposed to do ! 

Trading is just like any other profession. It takes time to

  • learn the knowledge
  • understand the issues
  • internalise the methodology
  • practice 
  • re-assess  
  • master its psychological issues
  • do enough practice trades to see if it there is long term consistency in returns
  • build enough 'disposable' capital to test the market safely

Even though the 'study materials' may be covered in a Seminar, 'trading' itself cannot be mastered overnight , or in two days. Once learnt, it takes time to develop and internalise the skills and knowledge. It is just like learning and studying to be an Engineer, Doctor, Architect, Pilot, etc..It requires an incredible amount of practice before going out into the world to start trading a real funded account ! No doctor would be allowed to operate on a patient unless he has been successfully trained to do so. No civil engineer would be allowed to build a skyscraper after attending a weekend seminar ! Neither would any pilot be allowed to fly a commercial airliner after a 2-day 'crash course' in flying !  

But strangely enough, everyone has mysteriously gotten the idea that the trading profession is somehow different. There may be a few reasons why this may be, namely:

1) There are no exams or qualifications required to trade the stock market or futures exchange

2) There are very few proper trading courses or programmes that teaches the real issues of trading, its consequences & solutions. The majority of trading courses are so fearful that the real truth may scare prospective students away, that they 'water down' the courses to make it sound ridiculously simple, effortless and instantaneously profitable. Like Einstein said, 'Make everything as simple as possible, but not simpler !'. This is of course, true wisdom, but the word 'simple' is in itself a relative term. Many schools re-interpret the word 'simple' to their commercial advantage and then present a trading course that is dangerously inadequate to cope with the harsh realities. In fact, one trading school actually promised that trading is so easy that even your 8 year old child can learn to trade for you ! Advertisements are the major offenders, invariably creating a false sense of 'easy money'. It is therefore not surprising that the masses are under the impression that 'Trading is simple'. They seriously misjudge the learning curve required to turn uncertainty into consistency. This disillusionment inevitably turns into harsh realisation, not very long after entering the markets. Just because anyone can enter the markets does not mean that it is easy to trade.

3) No doubt, there are techniques that actually let you trade without much preparation, spending only minutes a day, but they come at a very high price, not in the short term, but in the long run. Unless statistical optimisation is employed, any subsequent success will only be in the short term. This is never ever explained ! Just placing an initial stop loss with a limit order to exit is not the answer to everything. Also, Money Management is usually taught, if at all, without really highlighting its subtle weaknesses. Even Technical Analysis is taught without the realisation of its contradictory trading implications.

Successful trading requires true dedication and a sincere commitment to succeed, long after the Seminars have concluded. It is truly remarkable that many people still underestimate the steep challenges involved in trading. After all, trading is about trying to extract profit from uncertainty, or near randomness ! Now, if that is not challenging enough, I really don't know what is !

In Real Terms, 'Consistently Profitable' Trading Requires:

  • Consistently Hard Work & Perseverance
  • Sufficiently Adequate Trading Education
  • Trading Discipline
  • Superb Trading Skills
  • Superb Analytical Knowledge and Skill
  • Superb Risk Management Knowledge and Skill
  • Proper Application of the Trading Rules
  • Timely Trading
  • Psychological Wisdom to Distinguish between Price Analysis and Price Trading
  • Sufficient Capital for the Targeted Instruments & Markets
  • Full Acceptance of the Potential Risks Involved and Every Protective Step Available
  • Proper Money Management to Sustain the Account Long Enough to allow the Strategy an Opportunity to Work
  • Proper forward practice with over 200 trades done to assess the trader's longer term performance ! 

THE TRUE TEST OF TRADING SUCCESS: The Statistically Significant Minimum '200' Trades Benchmark Level

As mentioned elsewhere, anyone can make money in the short term ! Even gamblers ! But the ability to maintain a consistent long term profitability is the real mark of success for any trader.  That is why unless a trader has 'forward tested' the strategy for at least 200 over trades in real time, he or she has absolutely no idea whether they will be profitable in the long run. And even if they are not profitable, at least there is an opportunity to analyse the cause of the problem, without losing money unnecessarily or going bankrupt ! To demonstrate profitability in the long run is the ultimate goal of every trader, for only upon achieving longer term success will you be able to consider making trading a career and profession. (Incidentally, the 'statistically significant' minimum of 30 test trades is totally inappropriate in trading, though acceptable in standard statistical studies).

The idea is to make sure that the reason you are making money is not just attributed to mere luck. As professional traders, where we actually intend to trade for a living, there must be a recognisable consistency in your average monthly returns, and this can only be ascertained after a large number of trades have been executed.

Therefore, we must take very lightly, and somewhat humorously, when we see adverts like:

  • ''I made 100% in 3 Trades''
  • ''Made $100,000 in the first month''
  • ''Won 14 out of 15 trades"

Some of the claims may in fact be true, but, there is no indication anywhere that the trader will be able to withstand the longer term vicissitudes of price and market action trading. Short term pronouncements like these do not give the true picture of what is needed to succeed and truly survive as a trader. The operative word here is 'Survive'.