By Mike Baghdady
It sounds so seductive. Be your own boss. Work anywhere at any time. Unlimited income potential and a relatively short instruction period. Minimum capital requirements. No wonder so many people have tried to become day traders. However, the success rate has sent most would-be “retail” traders heading for the exits with their financial tails between their legs. Indeed, there is now broad cynicism about trading from the thousands of day traders who have been “seduced” by the possibilities trading offers. I say “retail” because most of the new breed of day traders are independent and either self- taught or have taken one or several of the myriad of online courses promising the necessary tools for trading.
I say “seduced” because the changing attitudes toward being an employee. Layoffs, burnout and the search for an alternative profession that allows for a more flexible life style have been leading many talented, educated and ambitious people to enter the world of trading. But so far, the data is a bit discouraging for the retail trader. Sadly, only about 10% of active traders consider themselves as “successful.” In this short article, I will tell you why I think this dismal statistic exists and what can be done about it.
Investing vs. Trading
Over the last few decades, more and more people have been introduced to the Investment industry. This has happened for two main reasons: Affective marketing by the Investment and Banking industry and the age of the individual retirement accounts and non-defined pension plans. Many companies have moved away from the defined benefit retirement plans and transferred the burden of funding retirement squarely on the shoulders of employees. Indeed, millions of people have been forced to learn about investing. And, for the most part, the Investment and Banking industry has done an admirable job of educating the public on the concepts of long-term investing and the power of compounding gains over time.
The growth of the internet discount brokers and an oversupply of licensed equities brokers, financial planners, insurance agents and ex-institutional traders has fueled the exponential growth of online investment training and investing sites. And many of these programs are well designed and provide value. However, the Investment and Banking Industries are focused on long-term investing for wealth building and capital preservation.
The gospel for investing has been to learn how to identify investments that have certain fundamental and technical characteristics that will yield a positive rate of return over time. You see, the underlying premise is that growing demographics will push demand and well run and capitalized companies will be able to meet the demands of customers and competition. As the important mandate of job creation is at the heart of modern economies, inflation is a variable that greatly affects monetary policy. Indeed, inflation needs to happen but in a controlled fashion. That also implies long-term economic growth. This is at the heart of investing and the goal is to own shares in successful companies that will be profitable and beat the rate of inflation over time.
Not so for Trading.
Trading is the skill that looks for profits in short term price movements-up, down and sideways. The trader only cares about making a profit from PRICE Movement within a relatively short time period. It has nothing to do with value, industry or quality of companies. A trader wants to be on the right side of the price movement at any point in time. If equities, currencies or any other tradable vehicle is losing value, the trader wants to be able to capitalize on the downside. Likewise, traders capitalize on upside moves. But here is the big difference: Successful traders learn that consistent profits are made from understanding how the human factors of fear and greed affect price behavior by using technical trading techniques. Technical analysis-a popular part of investing- is concerned with historical data based on past price behavior. Traders rely on real-time price movements and volatility. Indeed, traders adhere to the saying: “Trade what you see.”
When investors and traders are making solid gains and feeling good, what happens if the price starts to flatten out or retrace some of its prior gains? Is there fear that the paper profits will evaporate or even turn into losses? What happens then? Likewise, when traders find themselves caught on the wrong side of a trade, what happens? These are some examples of where successful traders go hunting because they know the high probability of how human emotions can affect prices.
Once the chart patterns show the proper signals, the trader takes premeditated action on real-time price movements. Whereas, investor mentality pins its hopes on historical data that attempt to correctly “guestimate” market direction. Indeed, once investors see movement against their expectations, fear and uncertainty can drive investors out of their positions. Traders are waiting to oblige their fear or greed by taking the other side to the trades.
What can be done?
Very few courses or software focus on how to trade; they are more dedicated to the idea of buying low and selling high. My thirty five years as a professional trader has taught me a lot about the rules of trading, and many of the golden rules taught about investing such as “the trend is your friend” or “let your profits run” do not apply to certain types of trading. In fact, they usually get in the way.
The good news is that the dream of independence and unlimited potential wealth building as a successful trader is not dead. You just have to learn how the rules of trading work and how to implement them in a consistent and disciplined manner. I have a fifteen year old successful trader on my staff and if he can do it, so can you.
Bio
Mike Baghdady is known as the foremost expert on Price Behavior Methodology. With thirty-five years of professional trading experience-and still trading-Mr. Baghdady has been a lead floor trader, trainer for major institutional Investment companies and the recipient of top trader awards. He is now the principal of TrainingTraders.com and developer of proprietary trading software used by many major Investment institutions. For more information, www.trainingtraders.com
