How to avoid being in the deep end without a life jacket

Published in Your Trading Edge Magazine, February 2017 by Dale Gillham

Why do seemingly intelligent people do dumb things when it comes to the share market? You would think that smart people would do smart things. However, when it comes to trading doing what is smart is not always foremost in the minds of novice traders’.

Let me ask you, if you didn’t know how to swim would you jump into deep water without a life jacket?

Whilst the water may look inviting, a smart person would decline as logic suggests that the chances of survival would be low. We all know that the best way to learn to swim is under trained supervision in shallow water where you can touch the bottom in case you start to panic. Panicking in deep water is a precursor to drowning. But what does that have to do with trading?

Quite simply, many traders start out in deep water before they have learnt to swim. They jump straight into trading highly leveraged markets such as Forex (FX), Options, and CFDs without a lifejacket, only to realise their mistake when they are in deep water and drowning.

Unfortunately, novice traders are generally seduced by ads promoting that anyone can achieve financial freedom quickly through trading highly leveraged markets. For some reason, as I mentioned previously, many otherwise intelligent people turn off their brain when they see this marketing hype and do dumb things like opening up an FX account when they have never bought a share in their life.

It is not my intention to convince you not to trade FX, as this vehicle can provide the opportunity to make a lot of money. However, your experience and the result is likely to be better once you know how to swim!

Let me get one thing straight, a trader is what a person becomes by acquiring the right knowledge, building their skills and gaining experience in the market. But how do you gain the right skills and experience if you haven’t built the foundation to trade right first?

It is important to understand that FX, CFDs and Options are simply leveraged vehicles through which to trade, however, if you don’t know how to trade shares, how do you expect to succeed in a leveraged market? This probably explains why all too often we get phone calls from FX traders who tell us they are doing okay but in the next breath they ask us to teach them how to trade.

This usually means that they are inconsistent and are losing, or are not very profitable, and they don’t really know what the solution is to correct the challenges they are facing. In other words, they are drowning in deep water, and don’t really know how to swim properly to get themselves to where they want to be.

If you want to call yourself a trader then you need to know how to be profitable in all markets. I tend to find that individuals who haven’t spent enough time learning how to be a trader don’t have a deep enough level of understanding to be able to:

• master the most important trading techniques, which is what an educated trader knows is key to their success,
• determine how to correct what’s not working in their trading strategy at a technical level,
• self assess to determine how to improve their own psychology.

Part of the reason otherwise intelligent people start out in deep water often comes down to ego. Some people believe that because they are knowledgeable in a totally unrelated field, they should be able to pick up trading quickly. As anyone who has traded markets successfully knows, this is a false belief.

Just because you are a doctor or an engineer doesn’t mean you can trade financial markets. An engineer couldn’t do a weekend workshop on how to become a doctor and walk into a hospital to operate.

So too, a doctor couldn’t do the job of an engineer, without the right knowledge, skills, and experience.

Ask yourself, could someone do your job after watching a few short videos or attending a weekend workshop?

So why put your financial future, or that of your family, at risk based on a pre-tense that is false?

The markets are a great way to bring people back to earth as they do not discriminate based on the level of education that you gained at school or university. Some of the best traders I know would agree that they are not highly educated in terms of formal education; however, they all agree that what makes them consistently profitable is that they know and can apply the skills required to trade.

The problem for those new to the share market is that they don’t know what they don’t know, and as a result will pretty much believe a lot of misinformation about what it takes to be a trader.

Unfortunately, it is human nature for people to want to do what seems easier, or cheaper.

Put simply, most novice traders don’t have enough reference points to be able to make the educated, smarter decisions. As previously mentioned, having a solid foundation allows you to trade any vehicle, but more than that, it allows you to make smart decisions. You will know what is relevant and beneficial to you and what information is merely scratching the surface.

So why put at risk your financial future, or delay the rewards, by starting your trading journey in deep water without your lifejacket?

While highly leveraged markets can make you lots of money, and quickly, the reality is usually the opposite occurs for uneducated or poorly educated traders.

Here are some simple steps to get you started the right way:

• Firstly, stop thinking about trading being about the market you trade; instead see it as knowledge, skill, mindset, and a set of strategies you develop. Shares, FX, Options, and CFDs are just vehicles or markets that the trader can trade.
• Once you have decided to become a trader, you need to be committed to getting the right education. I am not talking about watching free videos on YouTube. YouTube is great if you want to learn how to make a banana cake, or find a way to remove a coffee stain from your favourite shirt. Learning to trade this way is fraught with danger and will result in you spending a lot of time trying not to drown or treading water rather than swimming with confidence. Also, getting an education will cost you one way or another, so if your education is free or if it costs next to nothing then the fee to learn will come from lost time and capital. And be prepared to spend a lot in both of these areas as you get what you pay for.
• Be patient, and resist trying to take short cuts that could have you in deep water without a life jacket because building real wealth takes time, so does becoming a great trader.

To learn how you can gain the required knowledge and skill to ensure your success in the stock market click here.