Friday, September 03, 2010

Is Trading Even Worth It?

As I have written these articles over the past several years, I have always made the assumption that everyone probably would love to trade just as I do. However, I'm not so sure that is true. As far as I am personally concerned there are quite a few significant positives about trading aside from the fact that I have been fortunate in my own trading career. One wonderful fact about trading is that I have no boss. Obviously there are good bosses and bad bosses and I have had both over the years. Whether good or bad, any boss has a great deal of control over our lives and I personally prefer that others have less rather than more control over my life. Another positive for me is that a trader does not need to have any employees. For much of my legal career and when I owned a retail business I had employees. Most of the employees were wonderful people, many of whom I still count as friends, but the truth is that employees bring headaches. Benefits, vacation schedules, motivation, sick days, not-so-sick days, office politics, all involve at least a modicum of hassle that doesn't exist when you have no employees. Trading also permits me to set my own hours, travel when I choose, vacation when I want, work almost anywhere I please when I please, spend time with my family, engage in sports and hobbies that I enjoy and generally live a life of relative freedom. Clearly all of these things can be enticing, but there are down sides to trading that prospective traders might also want to consider.

Chief among the negatives of trading is that many traders lose. People ordinarily don't get into trading with the idea that they are going to lose some or all of their money but the truth is that many do exactly that. In recent years, the initial phone calls I have received from people calling to inquire about coaching begin with some statement relating how much that prospective student has lost. Some have lost all of small accounts, others have lost literally hundreds of thousands of dollars before deciding to seek help, some are so shell-shocked that they are no longer able to buy even a few shares of stock. These situations are sad, but they definitely are not rare or even unusual. People can be devastated by what they have done. Universally they began trading with the belief or at least the hope that they could make a lot of money only to lose great chunks of self esteem along with their money.

I regularly get phone calls from traders, even successful traders, who are in panic about what the market may do. Recently a coaching student and friend called me in panic because the markets were falling on that day. He had achieved a 40% gain the preceding year and was still making money but was feeling (notice feeling means emoting) that he couldn't predict what the market was going to do. "No kidding," I told him, "neither you nor me nor anyone on the planet can tell what the market is going to do or when it is going to do it." We can't know tomorrow's news and if we could we should buy a lottery ticket instead of investing in the market. My friend complained of great stress because he couldn't know what was going to happen yet the truth is we can never really know what is going to happen ahead of time. We constantly predict, but those predictions are often just plain wrong. If you haven't already noticed, listen to how rarely the economists are correct in their predictions. The weather segment of the news always seems to have a headline attached as a prediction but I can't tell you how many times snow storms predicted in Colorado have failed to materialize or snowstorms have hit with a vengeance on days when nothing but sunshine was predicted. Each year the number and intensity of hurricanes are predicted and sometimes the predictions come close. The point is that prediction is a business that often enjoys less than great success. It is true in life and it is true in the markets that predictions often fail, but many who understand that concept nevertheless find themselves stressed when they can't accurately and always predict the movement of the markets or of a stock.

There are ways to deal with trading that reduce or minimize risk, but in my experience they have little to do with predictions. Using an appropriate reward to risk, for example, can assure that a trader might predict direction incorrectly 7 out of 10 times yet still be profitable. In that case it isn't that he is a good predictor, it's that he is a knowledgeable trader. If one finds too much stress in trading I would suggest he may either stop trading or find a different way to trade.

Finding that different way to trade may not be easy. It requires effort and is not for the lazy or unmotivated. There, again, is another reason not to trade. Contrary to some popular beliefs, successful trading is work. It requires effort. It requires study. It requires practice. Deciding one day that one will become a trader accomplishes nothing unless the would-be trader is willing to pay his dues by devoting time and significant effort to study and practice.

Many folks are also risk averse and while all of life involves risk, it is perhaps more readily apparent in trading. Every trade involves risk no matter what the traders prediction at the time of entry. Fear, stress, risk, knowledge that many (if not most) traders lose, time constraints, and unwillingness to commit to do what it takes are all very valid reasons not to trade. Each individual might well give considerations to those potential negatives before answering for himself the question: "is trading really worth it?"

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

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Steve R. said...

I really value your Weekend Newsletter because you speak from personal experience, with complete honesty, and are never self-serving.

I don't know if you cover this in your books. Could you comment on the different types of trading, such as day-trading, swing-trading, etc. and the difference in time-frames and strategies for different types of trading?

Bill Kraft, said...

Thanks for writing, Steve. I don't cover the distinctions between day trading, swing trading the difference in time frames in my books per se. I'll write a little about that in next weekend's article. Thanks for the idea.
Bill Kraft

Anonymous said...

Greetings again Bill!,

When I first started trading I got "lucky " a few times and I lost several times for reasons that were not originally clear. But, as for reading, like SEC documents on a particular stock, it is the most invaluable thing I could have done. A stock might appear to be going up, and yet if you read the SEC documents, a reverse split might be planned in the near future. If one is experiencing a nice rise at that time it may well be good to get out near or at the estimated top. Just with that idea in mind, I have greatly diminished my losses.
As you said, you have to put in the time in reading. Otherwise as I have had the experience, you can lose because you didn't know the stock, "intimately".
And as for stress, yes, it happens for me cause' I don't like to lose. But over time I see that , for sure, you can't always win or predict the market.
Great article!!

Ivo Leclère said...

Good article Bill,

It took 7 years and a cost my a lot of money to find a personal strategy.
I made a mistake to start "real" in future without a good tradingplan.
A simulationaccount is in my opinion a first step to learn without emotion, fear and greed. A second step is to trade trackers like qqqq with a small amount and a thirth step is trading with double and triple trackers. Little by little the profit is growing and the emotion are gone. Trading futures is the next step here.

Bill Kraft, said...

Thanks for writing, Jamie, and thanks for emphasizing a very important principle.
Bill Kraft

Bill Kraft, said...

Good comments, Ivo. Thank you.
Bill Kraft

Anonymous said...

Hi Bill another great Blog.
People have to realize trading is a Zero Sum game. Not everyone can be winners.Its a very tough game to beat.I dont know anyone personally that has made money over all in the markets including me.I would like to see a poll of a 1000 non profesional traders to see
% of winners.
I do have to admit I am getting better due to your help with taking small loses,but have a long way to go to get even.Trading is one of the few jobs where you can go to work all day and end up paying money out .Thats hard emotionally.
You said previously that you only work 2.5 hours a day checking all your holdings make the necessary changes, then you have the rest of the day to do as you please .I belive you when you say this but I think this could be misleading and the exception. I think for most traders there is alot of work to be done looking for candidates reading articals and studing techniques.New traders need to realize this.


Bill Kraft, said...

Great points, Morris. While my day is shorter now, in the first years it was at least 10 hours a day combining mostly study with a little trading. Even now after years of trading for my living I make it a point to devote regular time to studying trading and the markets.
Bill Kraft

Anonymous said...

Most of us, including myself do not know much about trading when we first enter the market. Therefore the expectations for easy profits are bound to be disappointed. When you truly study the books written by serious traders they will teach you that achieving success in that arena does not come easily. In fact, most people who do try trading drop out rather quickly as they lose more money than they ever expected. I found that I simply did not have the ability to sit and watch that screen hour after hour and was not skilled enough to trigger into profitable trades within a few minutes, as some can do. After all, most of us could not hit major league pitching so there is absolutely no reason to believe that most of us can be successful traders, i.e. making good money. If you must trade, I suggest, study the profitable methods and then enter slower moving swing trades with a small amount of capital.

Anonymous said...

I invest in the market to try for extra money. I don't know much about trading which is why on a Sunday of a 3-day weekend I'm on the computer, reading what I can find for free.

I do know a lot about being self-employed. I earn most of my money renting houses to college students. I ayways say I'm self-employed and only work on days that end in Y's. When my phone rings and a tenant is calling, I'm at work.

Bill Kraft, said...

Thanks for your contribution and thoughts, Anonymous who states "...expectations for easy profits...". That advice definitely could help many.
Bill Kraft