Edition 2: The Biggest Trading Misconceptions
In this week's feature topic, we're going to touch on some of the biggest misconceptions about trading floating around.
Over the last near-decade of trading, I've heard it all! From, "trading is just sophisticated gambling" to "the markets move too slow to make any money".
Face-palms ensure when confronted with these belief systems. The interesting common theme among the misunderstood and under-educated is their often overconfidence when making these assertions.
Considering statistics such as 90% of traders blow up 90% of their trading capital within 90 days of trading, I can see where the emotionally loaded sudo-confidence may stem from. If I ever blew up 90% of my account in 90 days, I'd sure have touch of resentment towards the markets! Wouldn't you?
That brings us to our first point.
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Misconception 1: Trading is Very Risky Trading can be very risky, and the way the typical beginner starts trading is indeed very risky! But it doesn't need to be. When trading is you set your risk parameters based on strategy, win rate of that strategy and how long it takes for your strategies' profitable edge to play out For example, even an incredibly talented trader who has a 90% win rate should never put his entire account at risk on one trade. If he did, it may play out in favour a few times, heck, he may even 10x his money if he doubled it on every trade, but probability suggest somewhere approximating the 10th trade he'll blow the entire account, being left broke and unhappy. Not so talented after all. He was not trading, he was gambling and would have gone better off at the roulette table. There's no place for gamblers in the financial markets. The experienced trader, on the other hand, understands the Law of Large Numbers and that what's required is large samples of data for true probabilities to play out over time. Patience is key, gathering small wins and scaling over time flattens the random distribution of wins and losses. I personally never risk more than 1% of my total account on any one position. Typically I'm looking at making 1.5% - 3% return per trade. Interestingly at the time of writing this, my win rate is actually less than 50%! (It floats around 40-45%). That means I lose more trades than I win, yet am still highly profitable. |
Misconception 2:Â "I don't wanna spend 10 hours a day staring at a screen."
If you're spending that many hours staring at a screen, you're doing something wrong.
A day trader's routine is mostly broken down into 3 parts:
1. Watchlist creation -> 20-60 mins in the morning seeing what (if any) setups are interesting that day. On a typical day there's 2-5 possible setups on watchlist, many of which require another 6-12 hours before presenting a valid entry.
2. Execution -> following watchlist creation, later that day one of the setups you identified as a possibility pings an alert set earlier and is now valid. Another 20 minutes is spent qualifying the entry, and if valid, the trader executes the position with a Stop Loss & Profit Target before going about the rest of their day.
3. Trade Management (Optional) -> depending on the trader's style, one may revisit the position 3-6 hours after execution to see if they can secure some profit by trailing the Stop Loss, or alternatively, let the position run as planned and either eventually hit the initial Take Profit (for perhaps +2%) or the trade fails and hits Stop Loss (for full -1%). The outcome is binary & does not require the trader to be at the computer.
In summary, it's not necessary to be spending more than a few hours per day on the charts. In fact, spending too much time on the charts can result in a trader over-trading and imagining opportunities that aren't present, hindering their account rather than helping.
Misconception 3:Â "I need a lot of money to make money trading."
It certainly helps if you have a strong foundation, but having hundreds or even tens of thousands is no longer required like it in earlier years.
In an upcoming edition, you're going to learn the concept of "how to turn $2000 into a $4000 monthly income". And before you start waving the 'too good to be true' picket, I'm not suggesting leveraging to the eyeballs gambling your way to a pie-in-the-sky 200% monthly return.
Though we've all seen those silly claims, this is not one of those. This is a sustainable full-time income method that is available to everyone and is purely skill-based, not requiring huge sums of capital.
Prop Firms:
Prop firms are companies that are actively seeking talented traders to give start-up capital to. They offer a generous profit split (many up to 80% being your share) and don't require an interview, resume or schmoozing the recruitment officer.
Nope, all they require is for you to trade a demo account for them for a few months, meet their trading parameters and wham-bam, they give you an account to trade.
Account sizes usually range from $50k-200k with the ability to scale it over time based on performance.
I'm currently trading a $200k account for a prop firm, and, like my personal account, the conservative monthly return I aim for is 5%.
An 80% split on 5% of a $200k account is an $8,000 monthly payout.
No investment, no personal money at stake, no risk (aside from them freezing the account if I violate trading pre-set parameters or lose too much money)
This is what I train beginner traders to achieve over at Pro Trader.
**Typical disclaimer: results vary wildly between individuals and varying market conditions. This example is not an income claim. Sometimes I have negative months where I earn nothing. Enrolling in Pro Trader certainly does not guarantee your success as a trader. Most traders fail, but most traders don't invest in their education either. Make your own choices.
