There are a few beliefs that I incorporate from experience and from the material I've read over time that makes sense to me and seem to hold some truth to them. They are as follows:
1. Anyone can make money!
That's the beauty of it, the fact that absolutely no skill, intelligence, or any other descriptor is required to make money. Similarly, that's also the allure of it which draws in so many willing participants. In fact, I'd reckon the reason why people end up losing so much money is because their first trade makes them money. It's really sick if you think about it. Consider the following scenario I just made up. The year is 1999, the stock market's booming and rap was still good. Meet Jim, he works in HR and just last week he made several thousand in the stock market. Jim isn't the sharpest guy around and unfortunately for him most office jokes are made at his expense. Dave works in accounting, he just graduated from a good school, and the only other person who thinks more highly of him other than himself is his own mother. Now, Dave overhead the cooler talk about Jim's financial success so now his brain's working overtime thinking "If Jim can do it, and Jim ain't a bright guy, than I sure as hell can too".
Dave doesn't really have any idea what he's doing but he just made his first trade and made some money. Of course, he will take it as a credit of his abilities. Dave is now hooked and there's no way out, especially not after he just made more in half an hour than he will the entire week. He will now increase his risk by using more capital in order to make even bigger returns. In the third trade, he starts losing right off the bat but doesn't decide to sell nor does he realize he still has profits from earlier if he exits now. Instead, depending on how much pain his ego can take, he will have given it all back to the market and possibly more. He's a bit shocked, but no doubt still has his resolve intact and believes he can make it all back in no time and so makes another trade. A winner again, he has his composure back and reassures himself that this isn't so hard after all. That unlucky sod will now be hit with a string of four hefty losses in a row - the market that is his mistress will punish him for his transgressions. His world now lays shattered and he will spend all his waking minutes wondering what went wrong.
The quest for the Holy Grail is afoot and Dave starts reading every piece of financial news he can get his hands on and is on the prowl for stock tips. He starts watching financial TV shows and reveres every word he hears from analysts and news anchors, forgetting that if they were any good they'd be out making money not wasting away behind a desk. Dave has fallen prey to something called the "free lunch fallacy" (which I just made up) where he believes the market owes him something just for existing. Since he's the particularly egotistical type, he will blame the market, corrupt wall street players that are out to get him, the government, his nagging wife, his broker, the people around him and not necessarily in that order either. He will lay blame on everyone except himself. Sure, Dave may beat himself up over losing money, but he will only pity himself and never realize that had he taken a look at himself, he might be able to correct his mistakes. Instead, Dave will help subsidize someone's car payments all because he's too proud to admit defeat. Our old friend Jim may not be smart, but he's doing something right. Jim sees a stock going up, so he's going to buy it too and follow the crowd. He knows he's not smart enough to fight a force bigger than himself, Jim is a simple but humble guy. Dave on the other hand will think it's too expensive and a dumb idea so instead he will opt instead to buy a stock that's been falling for weeks, thinking it's gotta bounce just because he bought it.
Had Dave started off losing 5 or 10 times in a row, I'm almost certain he would have walked away and swore off playing the markets as a sucker's game for fools and cheats. Unfortunately, Dave wanted the easy money and the good life and he got it, just not how he thought he would.
2. An object that is in motion will not change its velocity unless an unbalanced force acts upon it
Price movement is going to maintain the same direction until it is met by an equal or stronger force in the opposite direction. In this case, that force is money. Whoever has the necessary monetary force and resolve can change the direction of the market in their favour should they so wish. Respect that and follow whoever swings the biggest account or stay out of the way. Don't try to be a hero by going against the prevailing trend because hero's are only remembered for their glory and there's nothing glorious about trading.
3. There is no room for a discussion on morality.
Simple. Morality belongs in an ethics course, not here. Nobody puts their money on the line if they didn't think they could make more back. Free will involves consequences and part of that includes losing. Sure there are cop outs like traders add liquidity, or short sellers are pushing prices down to help out price discovery and so on. While those statements are true, it doesn't change the reality. At the end of the day, someone's lost money and someone's made money. Myself, I'm here to learn and if possible create a methodology that has the potential to generate a stream of income. I'm under no illusion that I will most likely not succeed or that I'm doing it for altruistic purposes.
4. Trading is not gambling.
The definition of a gamble is "to stake or risk money, or anything of value, on the outcome of something involving chance". Adhering strictly to this definition, then I can see how one could argue that trading is gambling. However, consider it from a different angle. Isn't being alive also a gamble? Take commuting for example - it involves risking one's life, arguably the most valuable asset one can posses, in exchange for monetary compensation and we accept (or dismiss) the small probability of dying that exists. That in itself is a gamble too but it is not really seen that way because the odds are so small that we tend to dismiss it. In fact, there is risk in doing anything, even doing nothing because at one point or another a DNA replication error will produce a cancerous cell. Thankfully, there exists mechanisms in which the cell will terminate itself so that it cannot replicate faulty DNA (see apoptosis). The conclusion is this - life is risk and all life ends in death - those small probabilities eventually catch up with you and like the saying goes, the only things certain in life are death and taxes.
Attempting to avoid it or dismiss its existence will not make it any less real. Instead, embrace the risk of life and realize that although it is impossible to remove it, we can mitigate it. Driving attentively, following speed limits, exercising and so on will mitigate risk of dying. Where people go wrong in trading and the horror stories come from is the fact that they have an irrational fear of risk coupled with a deep seated mental desire to avoid risk at all costs and be correct at all times. This translates into chasing after that winning system or blindly taking the advice of others on merit. On the other extreme, you have people who have absolutely no respect for risk and take on huge position sizes without adequate preparation and blowing out their accounts. Refusing to embrace risk combined with a brazen ego to never admit fault is how one loses. The reason why many rely on systems or analysts or financial news is simple - it takes away the responsibility of being wrong. When a trade goes sour, most people will initially refuse to accept the loss when it is initially manageable and instead exit when the loss is too big to handle.
The kicker is threefold:
• In a casino, the odds will never ever be in your favour no matter what
• Secondly your bet is completely gone when you lose. Given an infinite amount of games, the house will always win.
• Therefore the only way gamblers can win is by a streak of wins and/or proper money management but never through odds (unless it's Poker)
In the market, you generate the odds and are ultimately responsible for the freedom that this entails. When you are wrong, you can recuperate your initial investment with minimal loss if you act quickly. This means taking trades with a good probability, risking manageable amounts of money at one time, and exiting losing positions quickly. I never intended this post to get so large, so it's commendable if you've reached this far.
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