Trading Traps
Published in the ASX Investor Update.
by Dale Gillham
There is a saying that ‘we learn from our mistakes’, but if that is true, why do people continually make the same mistakes believing it will be different this time?
Some time ago, I received an all-too-familiar phone call. It was a gentleman who had been investing in the sharemarket and had made some money. He told me he was going to take six months’ long-service leave and trade options full-time in an effort to become a full-time trader, so he would not have to go back to work.
Other than reading a couple of books, he had no education in the sharemarket and had simply made money in a very bullish market. So what do you think his chances will be of becoming a successful trader if he takes his long-service leave now and does nothing more to educate himself?
Statistically, anyone trading options has less than a 5 per cent chance of being successful in the long term but that aside, even if he were to trade shares, what do you think his chances would be? At best guess, I would say less than 50 per cent; to be truly honest I believe it would be less than 30 per cent.
If you want to become a full-time trader you need to follow the ‘Be, Do, Have’ principle. You need to BE a full-time trader, DO what a full-time trader does and then you will HAVE what a full-time trader has.
How to become a full-time trader
It takes at least two years for anyone to become a full-time trader, if not longer. Knowledge is everything in the context of trading. The streets are littered with would-be traders and, when are more buoyant, than now many are profitable mainly through sheer luck rather than good knowledge.
Unless you have been trading successfully for more than two years, you cannot consider yourself a trader.
To be a full-time trader, you need to combine a high level of knowledge with experience; without this, your probability of success over the longer term is very low. When you leave work to trade full-time, you no longer have the security of a regular income; therefore your attention is often directed to making profits from every trade to pay the bills.
This need for survival often results in the trader trying to trade more to make up for any trading losses or failure to meet their expected financial needs. A spiral of increased pressure begins, resulting in the trader taking higher risks to get back on top. Unfortunately, because of their lack of knowledge and experience, many end up back at work.
Being a full-time trader does not mean you work every day. It simply means that your trading is paying for your lifestyle. (This is a very important distinction and one I suggest you ponder if your goal is to trade full-time.) If your goal is to replace your income of $100,000 a year, it does not mean you have to make around $2000 a week from trading. It just means your total trading profits over one year need to equate to $100,000. Looking at it like that rather than the micro view of generating $2000 a week, will make a dramatic difference to your psychology and how you trade the market.
Capital and percentage return
Another very important point: only subject yourself to the amount of risk you need to achieve your goal(s). For example, if you have $500,000 to invest and you need an income of $50,000 a year, you only need a return of 10 per cent. Just by buying the top blue chip shares for the medium to longer term should deliver this income in a reasonable market.
If you only have $100,000 to invest and you still require $50,000 in income a year, you will need to generate a 50 per cent return on your capital. Therefore, you will need to trade shares that assist you in producing this return or use leveraging in your trading plan.
If your goal is to become a full-time trader, I highly recommend you prove to yourself that you can not only trade but also make the sort of income you want from trading while still working.
To learn how you can gain an education that will deliver the results you deserve, click here.
