So I said earlier Trading is simply Buying and Selling.
When I first tried to learn to trade – went to seminars and read books and first things they talk about is how to open a trade or “Entry” techniques… then comes a parade of Oscillators, Stochastics, Bollinger bands, Fibonacci numbers, Moving Averages (exponential, weighted etc)… just hearing these terms already give me “indicator overload” and confuse the *%r$^ out of me! I guess for years I just traded using the simplest indicator (the one that I actually understood? Then forgot which one now)….after all so many Myths abound in Trading. I am writing about them here in the hope that it won’t stop you to learn to Trade or altogether get messed up!
Here are my favourites :
1) Myth 1 : The Need to be Right — why Entry techniques or use of indicators are so popular is because traders have a need to understand, need to explain, need to be right. In the book “Trade Your Way to Financial Freedom” by Dr. Van Tharp, I picked up the idea that “Being right has very little to do with making money”. Traders think they can control the outcome of their trading by knowing everything there is to know before entering a trade, the truth is, after Entry, the market will do whatever it is going to do. HAHAHA
Discovering this idea is so liberating. I don’t have to “sweat the small stuff” trying to understand and explain. So in my Trading, I include in my preparation reading about what is going on in the market, what has happened in the share price – but I always give myself an allowance or room to move, after all, I can be wrong. (Don’t tell my children…;p )
2) Myth 2 : It’s Risky Business – Risk is found in every worthwhile activity of humankind. A life-saving surgery has risks. Driving has risks. Even a pleasurable activity like Shopping has risks. (what overspending? ). Key is to understand and prepare for what the risks are. In Trading, most of the risk is not exercising Self-Control.
My favourite analogy with Risks is Trading and Driving. Let’s see, how does one get into trouble with both :
a) Not Focusing at the task at hand
b) Not following the Rules
In Trading, it is worth mentioning that you make Trading Rules that is right for you. If you don’t have a set of rules to follow, stop trading, work out the system and paper trade. You’ve been warned! I made this mistake too,,,my company was a “non-profit organization” for years ;p
3) Myth 3 : Losses are bad – Do you ever get a telemarketer from a big company (tempted to mention a pesky one here) calling to offer you a “Special Deal” and yet you still don’t want it? You just costed that company money because of the time, staff, tools and communication costs to contact you and try to make a sale. That’s a loss. And yet they are still in business (wooo hoo!) Somehow, the telemarketers generate a sale from other leads. Same is true in trading. You don’t have to always win in order to be profitable. You have to make Losses a part of Trading. Key to Trading is keeping Losses small and make a winning trade’s profits grow as big as possible. So spend a lot of time learning and mastering how to do Profit-taking EXITS, rather than Entry strategies that get so hyped up.
Say you have $10 and for every trade, you spend $1. After 10 trades, you have 7 losses of $1 and 3 gains — 1 of $3 and 1 of $5 and 1 of $6. You lose 7 times amounting to $7 however your gain from 3 trades is $14 which gives you a total profit of $4 or 40% of equity. Compare that with a Term Deposit here in Australia, the highest in the world at 6% annual rate …. What is not to like?