You might be wondering what the heck is wrong with us to ask that question? Well, of course, people are trading for profits, right? The answer is way more layered than that and it’s much less obvious than a new trader would imagine. Also, believe it or not, answering that question is the first step towards success in the market. Why? Because in the long run, only conscious traders remain successful (or at all present for that matter…) in the market. Consciousness means knowing your long-term goals and acting upon a plan to achieve them. That implies knowing the possible benefits and dangers of trading. In this post, we will focus on the pleasant part of the equation, the benefits.
Trading as a Self-Awareness Course
When you start trading, whether or not you realize it, you are signing up for one of the most effective self-awareness programs. And by the time you are a seasoned trader, one thing is for sure, you will be more observant, objective, and self-conscious than ever. You could think that this is some kind of metaphor, but in all honesty, you will probably really have to change your way of thinking. Of course, everyone is different, and some people are naturally closer to the right mindset, but generally speaking most people are wired to lose money with trading.
Controlling your ego and suppressing your fear and greed is the name of the game. Trading requires simply looking at opportunities as they are, not in the light of your previous trades, your need for profits, or your fear of losses. The good news is that if you learn these skills they will be helpful in every part of your life, not just trading. It’s no coincidence that great entrepreneurs are way more often successful traders than the average. Objectively looking at options and choosing the best outcome is a universal skill, and one that all successful traders share; acquiring this skill should be goal number one.
Short-Term Profits vs Long-Term Success
That sounds nice, you might say, but when do you get to count your profits? For that, patience is required. Because knowing if you are successful in trading or not in the long run is simple—if you are making profits consistently in all kinds of environments than you are successful, period. Long-term the market provides this simple, yet very robust verdict.
The short-term evaluation is the tricky part. Are you having stellar winners, and virtually no losers? You must be the next guru you might think. In reality, that usually means that you are on a roll, or you have a lucky streak. Projecting those winners to infinity inevitably leads to disappointment and regret. This means that counting profits comes after looking at your trading in the light of your strategies and your trading plan. If you are sticking to them then you will be successful in the long run, if not you will most likely fail.
The Art of Losing
A highly successful trader said that the most important thing that he learned in his career is losing. Losing trades are an inherent part of this business, and dealing with them is what separates successful traders from the rest. So, one of your biggest achievements for you will be to learn this art. Letting go of losing trades seems like a simple thing, but in practice, it’s probably the hardest part in sticking to a trading plan.
“It will come back…” “I will hold it until it gets back to even…” Sounds familiar? All traders experience the sensation when a trade goes negative and the ego switches into denial. Of course, sometimes you get lucky, and it really comes back, but the point is that you acted against your strategy and your plan. Taking small losses is a great skill; sitting out huge losses is not.
Acting on Probabilities
Sticking to a trading plan requires objective thinking and courage to face uncertainty. Besides of the skill of taking a loss, accepting that nothing is certain might be the other game changer for traders. Trading is a business of probabilities. That is very hard to the ego, as it means that you will have losing trades even with the best strategies and perfect discipline.
The problem with this is that people are generally “programmed” to avoid danger and uncertainty. Numerous studies show that even when the possible outcomes would favor a risky strategy, people tend to choose the safer, seemingly less risky way. Evolutionally this makes sense; if you have a little chance of a bear killing you somewhere then you would rather not go there, even if there are beautiful berries. In trading, this is a losing mentality.
Choosing the best outcomes (with the most probable profits) without listening to irrational fear will lead to success. And again, this decision-making process will be with you outside trading, driving you to more optimal decisions in work, business, and personal life.
Getting to Know the System, and How to Hack It
When you are already capable of following a plan and do whatever is necessary, the fun part begins. You will start to notice patterns, familiar situations, and obvious opportunities. The financial system is huge with enormous amounts of capital moving every day from one asset to another. That opens up a vast number of chances for the individual investor to profit from.
For example, the technical trends that you analyze are often products of the capital flowing into an asset like a natural force. Would you step in front of an avalanche because it’s half way down the mountain? Would you trade against a trend because it’s already up “so much”? It’s basically the same thing. With trading, you can achieve the objectivity that is needed to jump into a long-lasting trend and stick to it as long as it lasts. Not standing in front of the avalanche, but actually surfing on it all the way down.
On the other extreme, you find scalpers, daytraders who are sometimes only in the market for a few hours, minutes, or even seconds. But the mindset is the same, they see the opportunity, apply their strategy to it, and follow the plan. As simple is that, but in order to be able to recognize and harness these chances, you have to be ready to act as soon as you need to. It’s easy to see that day-trading is
Trading vs. Investing or Trading and Investing?
Knowing when not to be in the market is one of the points where trading spills over to the realm investing. Even hardcore value investors use trading skills to exit positions; although sometimes they won’t admit or even realize it. Warren Buffet, who is strongly against trading strategies, instinctively uses his truly great timing skills. He famously said: “Be fearful when everyone is greedy and greedy when everyone is fearful”. It’s not just a great advice for investors, but also a perfect commandment for traders, although on different time-frames. He also correctly exited positions when he saw parabolic moves in his holdings, which more often than not are the signs of trend exhaustion—another great trading skill.
The takeaway is that with an open mindset, trading will not just simply help you to short-term profits, it will help your investment positions and investment decisions as well.
Financial Independence: Building Wealth
So, we finally arrived at the point of counting the profits. As a trader or investor evolves and gets better in decision making, acting upon probabilities, and sticking to the plan, a whole new dimension opens up. By the time you are a successful trader, the savings that you turned into working capital is growing to serve your and your family’s financial goals.
Wherever you are on the scale between a passive investor and a day-trader who is trading for a living, the final achievement will be wealth. Also, you will realize that this wealth will be dynamic and stable at the same time; dynamic because it will always have the potential of growing thanks to your skills, and stable because your decision-making process assures that you won’t choose silly choices.
We all heard about the “winner’s curse”, the stories of lottery winners who ended up worse off than before their lucky day. This has everything to do with the decisions that they make, the way people generally look at capital, and the lack of consciousness. If you build your wealth organically, through successful trading, investing, or any other business for that matter, you will always have the ability to grow even if disaster strikes. Your skills will be your real wealth, rather than money or possessions.
Our final advice is this: Set learning skills as your final trading goal rather than making profits.
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