Why Trading is a Foolish Game without the Right Education

Singer Bob Dylan famously wrote that ‘times are a changing’ and while this may be true, as economies and markets rise and fall, we’re not seeing this in human behaviour. For decades, I have been asked how do you trade the stock market or FX, CFDs and the list goes on. Over this same period, I have watched individuals repeat similar patterns when learning to trade, as those who have come before them, which means while times change people don’t.

This is why I often refer to trading as a foolish game without the right knowledge and education because the statistics don’t lie…the reality is that without the required knowledge and education over 95 per cent of all traders are unsuccessful over the long term.

The stock market stock will always be there but you may not

The interesting point I find is that those who ask questions about how to trade the markets expect the answers to be different over time. And while the questions may vary slightly, the answer is always the same regardless of the market or economic conditions. Being a trader or investor is all about who you become because where you place your money is simply a vehicle to achieve the goals you want to achieve.

The steps to becoming a trader or investor don’t change. The first step is to establish clear goals as to what you hope to achieve by trading the markets, whether it's generating supplemental income or long-term wealth accumulation. Without clear goals, the trader embarks on a very long journey of discovery that has many obstacles, as they play the trial-and-error game hoping to find something that works.

The next step is to educate yourself. It is crucial to gain a solid understanding of the fundamentals and skills needed to become a successful trader. Therefore, regardless of the market you decide to trade, you need to understand the various forms of analysis, how to manage risk and, most importantly, how to manage your emotions.

Before you decide to invest in the stock market, you need to develop a trading plan that will enable you to practice, evaluate, and adjust your trading strategy, as required. As I have said, the tools and analysis required to trade are the same regardless of the market, although the combination of rules you use may differ slightly between these markets.

It’s important to understand, that the market will always be there but you may not if you decide to trade using the ‘hope and pray’ method. If you desire a better outcome, then you must change the way you look at the stock market.

What were the best and worst performing sectors last week?

The best performing sectors included Materials up 1.53 per cent followed by Information Technology up 1.22 per cent and Health Care up 0.95 per cent. The worst performing sectors included Consumer Discretionary down 2.21 per cent followed by Consumer Staples down 1.40 per cent and Financials down 1.36 per cent.

The best performing stocks in the ASX top 100 included Northern Star Resources up 8.53 per cent followed by Newcrest Mining up 6.18 per cent and Amp up 6.10 per cent. The worst performing stocks included IDP Education down 15.76 per cent followed by Whitehaven Coal down 6.51 per cent and ALS Limited down 4.73 per cent.

What's next for the Australian stock market?

In a recent report, I mentioned that over the past 40 years June has statistically been the worst month in the Australian stock market with an average fall of 0.53 per cent. While I’m not saying this will be the case in June, it’s important to consider two things.

Firstly, probability suggests that the market will fall, particularly given that May, which is statistically the third worst month of the year, was down over 3 per cent. Secondly the Australian market has traded down and closed lower over the past two weeks, whereas my analysis led me to believe that price would stop falling and start to rise.

Obviously, the analysis has proven incorrect, which continues to show that the market will do what it wants and not what we would like, but it does confirm why I continue to warn everyone to wait for confirmation. So, where is the market heading?

The All Ordinaries Index traded higher last Monday only to fall over the next three days to trade lower than the prior week. On Wednesday, volume was quite high as it fell, while volume was almost non-existent last Monday. This may indicate an exhaustion of the down move, especially since the market closed higher on Thursday and Friday. That said, this may just be me being overly optimistic.

If our market does fall further over the next two weeks, there is a high probability it could fall below 7,000 points. If it rises strongly, then probability will swing to June being bullish with the market likely to rise for around six weeks. As always, be patient because if June is bullish, there will be plenty of time to profit in the second half of this year.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.