The uncomfortable reality of trading vs the myth

There’s a lot of bravado in trading – people talking up their winning positions … boasting about risk … flash cars … even flashier boats …

But that ‘Wolf of Wall St’ image is exactly why a lot of people get lured to their downfall. As Warren Buffett put it: “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

For me, the joy of trading comes from less stress, not more – escaping the daily grind, the money worries and concerns about the future. So here’s a reality check about what’s actually involved …

• There’s no monthly pay cheque

Probably the most common questions I get about trading are: How much do you make a year? How much can I expect to make from trading?

And it gets to the nub of what frustrates many people about trading – we just don’t get ‘ordinary months’ or ‘ordinary years’.

Markets are, by their nature, unreliable – that’s exactly what allows us to make exceptional profits. Even the best traders will have up and down periods. You may have a bad month … you may have a bad year …. Trading will never give you a regular monthly pay cheque. If you want to make a living from trading, you’ll need to be prepared to weather these storms.

Traders are often looking to make annual returns well in excess of 50%+, but it’s important to remember that if you’re going for hefty returns like this, then it’s not unreasonable to see a loss of 50% on your account either. You need a buffer fund to withstand drawdowns.

• There’s no secret formula

It’s a tempting idea – just discover the secret formula and you can make money again and again forever.

While I do have one trading strategy that’s been precipitously close to matching this fairy-tale story, even that gem has had some ups and downs and required occasional tweaks.

Many traders want to find the Holy Grail – a few indicators, that when perfectly combined will give winner after winner.

The problem is that markets will naturally correct around our money-making wormholes, so what works this year, may not work next year.

• You can’t get rich from a big win

Of course, it’s very possible to make £thousands on just a single trade. But that isn’t how wealth is built.

According to a US financial education charity, 70% of lottery winners end up broke and a third go on to declare bankruptcy. There’s no mystery to it – big winners are usually followed by big losses.

• More analysis won’t make you richer

Of course, if you want to trade the markets, you should look at getting yourself an education. I don’t mean a finance degree – I mean an understanding or risk, technical analysis and how markets work.

But don’t fall into the trap of thinking that learning more technical analysis, or listening to more market pundits will make you richer. Some of the simplest trading rules can make people rich – as long as they have good money management.

• You don’t need to quit your job

Yes, trading does take up time, but you definitely shouldn’t rush to quit your job to make more time for it. More time at your screens does not necessarily equate to more profit.

One of my most profitable trading methods only takes about half an hour a week. What’s crucial is not the hours/day, but that I’ve been sticking at this every week for years.

You can spend as little or as much time as you like trading, but only pick a trading routine you can stick to, long term.

• You don’t need deep pockets

Please don’t be put off from trading if your account size isn’t ‘big enough’. Waiting until you’ve got more money is a false economy. When you’ve more money, you can add to your funds, and you’ll already be a wiser trader!

A small account shouldn’t hold you back in trading. There are many strategies suitable to small funds [https://tradersbulletin.co.uk/trading-strategies-for-small-accounts/]. Nor should it stop you having ambitious goals for the future. Yes, it’ll take time to build, but learning and watching that growth can be part of the pleasure.

• The markets are not rigged – they’re just fickle

There’s a school of thought that markets are ‘rigged’. People normally adopt this viewpoint after hearing about high-frequency traders … stop hunters … and market makers …. Add into the mix some nasty losses, and it’s easy to jump to the conclusion that the market is rigged against us!

The reality is that we are tiny players in a global field, where there are many other investors with far deeper pockets. Being small is not without its benefits – we can be agile and are unlikely to have liquidity issues.

• Trading is not an easy option – but it could be the right one

While the home trader might not be living it up on a super yacht, don’t think they are shut in a back bedroom, losing money and worrying about their bills.

Relying on income from your investments is not a stress-free nirvana! It can put a lot of pressure on your trading decisions. But trading can bring huge rewards, more security and the lifestyle you want.

It’s not a get-rich-quick opportunity. Trading doesn’t need to be hard work – but it needs consistency to make it work. The ingredients for success are:

1. Motivation
2. Capital you can afford to risk
3. Time to invest
4. A willingness to learn (often from failure)
5. Discipline to keep with it

I know that I wouldn’t want to go back to the days of a 9–5, a boss breathing down my neck, and a monthly paycheck … It feels good to manage my own time, my own money, and not be making profits for someone else (although my broker does pretty well out of me!)

 

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