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I know what you’re thinking.
Trading is an easy way for you to earn quick money.
With just a few clicks, all your money problems are solved.
“No need to work for an old naggy boss and now I can work from home!”
Sounds good, doesn’t it?
Yes, but too good to be true.
Trading is not a hobby, you need to work hard to succeed.
So in this episode, you’ll learn:
- Why trading is not wins or losses (it’s about this ONE thing)
- Why trading psychology is not enough to become a profitable trader
- Don’t blindly follow common trading quotes because it’ll hurt your trading, here’s why…
Tune in to today’s episode now to set the record straight.
Hey hey, what’s my friend!
In today’s episode…
I want to talk about the reason why most traders fail and how you can avoid it.
Here are the reasons why:
- They are fooled by randomness
- They don’t have an edge in the market
- Traders treat the markets like their ATM
- They are not willing to do the work
Let me explain.
Fooled by randomness
What do I mean by this?
Imagine I play a game with you – a coin toss.
Every time the coin comes up heads you win $2.
And every time the coin comes up tails you lose $1.
Clearly, in this coin toss, the edge is in your favour.
Now let me ask you:
If the coin comes up tails 5 times in a row…
Would you stop playing that game altogether?
Unlikely, because that it’s a matter of time before heads come up again and then you start profiting.
But in trading, when you have 5 losses in a row or maybe even 3 losses in a row, you start to panic.
And then you start to abandon the trading strategy and look for something else. Can you see that there is this discrepancy over here?
So remember in trading, just because it’s a losing trade, it doesn’t mean it’s a bad trade.
In trading, you’re dealing with probabilities, not certainty.
If you don’t want to get fooled by randomness, my suggestion is to have a sample size of trades.
It depends on your trading style.
But to be safe, you’ll need a minimum of 100 trades to know whether you have an edge or not.
You won’t know whether a strategy works or not based on a 3 to 5 trade because of the law of large number.
There’s this random distribution between your wins and losses.
So only after a sample size of a minimum of 100 trades, then you’ll know whether a trading strategy works or not.
You don’t have an edge in the market
This is something I believe I heard from Jack Schwager, he said something really insightful.
He said that if you want to make money, you’ve got to have an edge in the markets!
Because I’ve seen stuff like traders say:
“Oh trading is all 80% psychology, all you need is the right psychology and the discipline and you’ll make money.”
But no, I can’t agree with that.
Why do I say that?
Imagine that you go down to the nearest casino in your place.
You can bring along the best psychologists, to pump you up before every gamble.
You can use the best risk management practices out there.
But I can guarantee you, the longer you stay in the casino, the more money you’ll lose.
Because you don’t have an edge over the house!
And this is the same for trading.
You can have the best psychology, the best discipline the best risk management out there.
But if you don’t have an edge….
You’ll lose in the long run as well.
You treat the markets like your ATM
Another thing that I see often is this:
“Rayner, can you teach me a strategy that just makes $50 a day?”
“All I’m asking is just $50, I’m not trying to be a millionaire; all I want is $50 a day.”
Well, what’s the problem with that statement?
The problem is if you expect consistent profits from the market every day, your trading strategy has to work every single day.
And if your trading strategy works every single day, it means that the market has to be in the same particular condition every single day.
Well, guess what?
Market conditions will change every day.
It is a fact.
And if market conditions change, it means that your trading strategy will go through a period where it works, and then it’ll stop working, and it works again.
So you can see that no trading strategy is going to work all the time.
And if no trading strategy is going to work all the time, you’re not going to make money all the time.
It doesn’t matter whether you want to make $5 a day, $50 a day, $5000 a day.
It’s not going to happen.
Because market changes and no trading strategy works all the time.
So if you have the mindset that you’re going to make daily profits…
I suggest that you look elsewhere.
I think a fixed paying job would be much more appropriate.
Not willing to do the work
They want to be spoon-fed!
I know it’s human nature that we want shortcuts, we want a magic indicator that spits out money by itself.
But the problem is if you’re not willing to do the work, you’ll never have the conviction behind your trading strategy.
For example, you have often heard this saying:
“Oh, you need a minimum of a 1:1 risk-to-reward ratio to be a profitable trader”
No, I’ve done my research.
A mean reversion trading system can have a 65% win rate and a risk-to-reward ratio of 0.8 and you can still make money in the long run.
Or how about this…
“You need to have a high win rate at 60-70% to make money in the long run”
No, a trend-following system is anywhere between the 30% to 40% win rate.
But the reason it makes money is because the average profit is 2 to 3 times larger than the average loss.
And that’s how trend followers make money despite a low win rate.
So if you were to follow trading sayings or common trading quotes…
You find that you won’t be able to make money!
Because it’s only through the research and development that you’ve done.
Only then you’ll have the conviction to trade your strategy.
So there’s no replacement for hard work and your own due diligence.
With that said, I have come towards the end of this episode.