What Trading is NOT
At the heart of trading is, of course, the attempt to make money.
Perhaps this seems obvious.
But we start by saying that, because, as you progress along your trading journey, you may find yourself tempted to fall into the trap of believing, as many others have and do, that trading is not about making money but is about something else.
Trading is not about being right, it is about making money. Equally, trading, when conducted professionally, is not gambling; it is taking calculated risks. The two are very different.
These are both important lessons to learn now at the start of your trading career, and spend some time thinking about. Forgetting either of these truths will see your trading career ruined.
It's Not About Being Right
You will, even as an experienced trader, or perhaps especially as an experienced trader, find yourself in trades that you come to love. They take on a life of their own and sure enough the trade becomes much more about being ‘right’ than it is about the money you will or won’t make.
It is these trades that can lead you to throw good money after bad, refusing to exit a trade even when all indications are that you were wrong, that the trade is going against you and you will continue to lose money.
Think of it like being in a bad relationship - everyone around you can see that you should quit now, but you keep making excuses - “they love me really!”
The markets do not love you. If you love a trade, that trade, sure enough will kick you where it hurts the most - your wallet.
Perhaps you should have this maxim written on a t shirt and wear it while you trade!
This attitude extends beyond individual trades.
Like in all disciplines, if you become wedded to dogma in trading, and make the pursuit of being ‘right’ your goal, then you will perhaps experience short term success, but sure enough you will come undone, like many great but ultimately tragic traders before you!
Trading is speculation. Speculation is the attempt to make money by predicting future price movements of certain financial products.
Again, attempting to predict price movements (i.e. be ‘right’) is not the aim. The aim is to make money, through speculation, when price moves in a direction that brings you profit.
It is absolutely essential that you view making money, and equally not losing money, as the goal. Trading psychology is one the most important aspects of trading as well as one of the most difficult to master. If you can accept this first lesson then you are on the right path.
Commonly, and unfairly, trading is equated to gambling. Sometimes even by traders themselves.
Those who criticise trading (often people who have lost money and quit without ever mastering trading…), usually suggest that it is impossible to predict future price movements, therefore Buying or Selling is just gambling, and as in any form of gambling the House is the only eventual winner.
In this case the House being your Broker who charges you when you trade.
But, these people fail to grasp the difference between speculation and gambling. Trading when done correctly is speculation. Speculation is not gambling.
It's Not Gambling
Speculation is about taking a trade based on an informed decision that gives you a positive expectancy that, over the long run, taking that trade is a profitable decision.
It is calculated risk taking. You understand the potential reward for a positive outcome, you understand the risk involved in a negative outcome, and you know the likelihood of either happening.
If you have this information you are speculating. If you don’t you are gambling.
Sure, you can gamble in trading.. If your mate tells you that Tesla stock is going to the moon and you buy a bunch of Tesla stock - well, that’s gambling. You are not informed and have no reason to believe that Tesla stock is going up. But if you read their shareholder reports, do your own analysis of the Electric Car market and decide that Tesla shares are undervalued, and you know what your risk, reward and likelihood of being correct is, well, that is speculation. Or trading.
Of course, Tesla stock may go down. But that’s ok, you are not ‘wrong’, any more than you would have been ‘right’ if it had gone up. No one truly knows what will happen to this stock or any other financial instrument. It is merely a profitable trade, or an unprofitable trade. You either made money or you lost money. That is all that matters in trading.
You will never know what direction a financial product is going to go. Anyone who claims to know is living in cloud cuckoo land. But if you are trading rather than gambling you should have a positive expectancy.
By positive expectancy we mean you should have reason to believe, ideally a mathematical reason to believe, rather than hope, that your trading strategy will be profitable in the long term.
How you create these strategies, and how you determine your positive expectancy, we will come to later.
This completes lesson two. So far you have learned what trading is, and what trading is not. This second lesson is probably the more important of the two.
If you can understand that trading is categorically not about being right, then you can avoid twitter wars over the direction of the Japanese Yen,and avoid being the person who declares their trading system to be the only one that works; before promptly losing all their money as the markets change but they refuse to adapt.
If you understand that trading isn’t gambling and ignore the naysayers who insist that it is and not one can make long term profits, then you can concentrate on creating proven strategies that give you a positive expectancy. You can trade them with the intention of making and keeping money and you will have a solid foundation for a long and successful career as a trader.
In the next video we are going to focus on Forex itself. Forex is where you will be starting your trading journey, and perhaps your first trading love will become your lifelong passion!