Build the Proper Foundation at the Outset Before the Market Humbles You:
Typically when someone is searching for the cheapest way to trade stocks, they’re usually concerned about the commission fees they have to pay to their brokerage firm for each transaction. A few years ago, a standard commission fee would’ve been about five to ten dollars per trade. These days, however, most major brokerage firms have completely eliminated commission fees for self-directed stock trades, including platforms like E*Trade, Fidelity, Charles Schwab, and TD Ameritrade, among others. So if you’re looking at the cost of trading stocks from a surface-level perspective, it’s nonexistent if you open an account with one of these brokerage firms.
But if you dig deeper, you’ll realize that the heftiest costs involved with trading stocks are the result of bad trading. The substantial losses that occur from impulsive, erratic, and irrational trading behavior. It’s important to realize that this type of highly inconsistent and emotionally-fueled trading isn’t rare amongst market participants – it’s rampant. And it’s the major reason why over 90% of traders ultimately fail. In fact, nearly 50% give up after just one month because they’re not equipped with the appropriate mental framework to be effective within the market environment. But with the proper focus on mindset (the foundation of successful trading) right from the start, you can completely avoid financially expensive and emotionally debilitating market lessons. Why put yourself through that level of pain by refusing to embrace the right mindset? The harsh truth is that the market will only continue to humble you until you do.
Top 3 Reasons the Vast Majority of Stock Traders Fail – Sidestep These Common Traps:
It can be discouraging to hear that the overwhelming majority of traders fail, but the good news is that failure doesn’t have to be your reality. Because with application of high-quality information regarding mindset and tactics, your odds of success are markedly higher than the average market participant. There’s immeasurable opportunity in the market for those willing to take the right approach.
1. Look Outward Instead of Inward
Society as a whole tends to focus on outward appearance instead of internal structure. Just take social media for example, which accurately illustrates this universal problem. A large number of active users on these platforms focus so much of their attention on other people’s lives that it comes at the expense of their own mental health. These people also become addicted to the short-term dopamine hits their brain receives from actions such as “likes”, “thumbs up”, comments, and shares. But is it worth the cost?
Now imagine these people operating within the market environment and it becomes crystal clear why so many traders fail. Their minds are compromised – they’re weak and undisciplined. They lack focus and self-control, and have a hard time regulating their behavior because of it. These naive, inexperienced traders spend all of their time looking outside themselves for THE answer – a “foolproof” system, “guru” alerts, and any sort of “get-rich-quick” method they can find. They place random trades, jumping from strategy-to-strategy, and losses inevitably start piling up. As a result, they turn around and blame external forces for their personal misfortune – never looking inside themselves for answers. They render themselves completely powerless by deferring responsibility, never making the critical connection between their own mindset (thoughts, emotions, perspectives, etc.) and the trading results they’re generating. Overall, the only thing they consistently do is prioritize short-term emotional gratification over being a long-lasting, successful trader.
2. Attempt to Cheat Cause-and-Effect
Knowingly or not, most traders try to cheat cause-and-effect. There’s a lack of understanding between how their inputs produce outputs. When they put garbage in, they get garbage out. Incredibly, most traders operate impulsively, carelessly, and irrationally, but then expect consistent, steady profits. Simply put, it doesn’t work this way. Surrendering to impulses by doing things like constant strategy-hopping, jumping into trades without triggers, removing stop losses, doubling-down on losing positions, and the list of unsound behaviors goes on-and-on, can only produce one overall outcome – random and inconsistent results. Not to mention that those random, inconsistent results will also most likely be negative, especially over the course of more than just a handful of trades. In other words, if they want to achieve consistent profits, then they need to implement a consistent, structured approach.
And that consistency has to start in their mind. The majority of traders bring attitudes, perspectives, and behaviors into the market that simply aren’t effective. These patterns of thought and behavior may have served them well elsewhere, but they don’t work within the unique confines of the market. This new environment has qualities and characteristics that we’re just not used to. We’ve been conditioned by society to rely on authority figures (parents, teachers, police officers, etc.) to provide us with rules, codes of conduct, and laws to follow for our own well-being. But the market environment, on the other hand, is limitless. There’s no external structure in place to stop us from taking bad risks and suffering the consequences of those actions. So we have to take matters into our own hands and create a framework for ourselves. By creating a system with a mathematical edge and cultivating the mindset to be able to execute that system with the highest possible degree of discipline, there’s nothing else really needed to be consistently profitable. Overall, operating within a new environment that has characteristics we’re not accustomed to requires change, especially within our mindset.
3. Possess False Perceptions of Entitlement
We live in a society that rewards certificates, degrees, and other qualifications that are basically just pieces of paper. We have an educational system that hands them out liberally, without necessarily preparing individuals for the job market. Even still, common practice amongst our society is to value these certificates. The stock market, however, doesn’t judge anybody based on the certificates, degrees, or qualifications that they have acquired. Your past achievements and reputation mean nothing to the market. Just because you have a degree from a prestigious institution or think you’re intelligent because you’re a lawyer, doctor, accountant, or have achieved success in any other field, doesn’t mean you’ll automatically be successful as a trader. It requires a specific mental aptitude to be able to weather the ups-and-downs of the market with stability and control.
Take Bob, for example. Bob has been a doctor for ten years, decides to deposit a large chunk of money into a brokerage account, and thinks he can make some quick money in the market. He’s smart and accomplished, so why not? He proceeds to put in a handful of hours of research until he finds what he considers to be an amazing opportunity. Since he’s so impressed by this opportunity and can’t wait another moment to take advantage of it, he immediately goes all-in. After all the research he put in, how could he be wrong? And if he can only be right, then there’s no reason to have a stop loss. Next thing you know this “amazing opportunity” turns into a “gigantic misfortune” and Bob is left devastated emotionally and financially. This type of scene plays out endlessly in the market. The moral of the story is that just because you view yourself as “intelligent”, “talented”, or “accomplished”, and that you devoted some effort and time toward researching a trade, it doesn’t guarantee a favorable result. The bottom line is that the market owes us nothing. We may consider ourselves to be good at math, researching companies, analyzing patterns, or trying to predict the market in some way, but the reality is that we will still be wrong a lot of the time. And without safeguards in place to protect our downside, we’re doomed.
Develop the Proper Mindset Unless You Want the Market to Teach You Expensive Lessons:
Predominantly, traders jump straight into the market completely unprepared, especially from a psychological perspective, and this mindless and misguided approach almost always leads to failure. But it doesn’t have to be this way and hopefully I can help many traders avoid this terrible fate in the future. Luckily, there are some individuals who are able to acquire the self-awareness and self-control necessary to turn their trading operations around for the better. Because they finally come to the realization that their mindset is the main problem, make the appropriate changes, and eventually succeed. In the end, there’s no greater feeling than to confidently implement a fluid and consistent approach, knowing that trades won’t result in emotional and financial misery because you have the internal (mindset/paradigm) and external (system/strategy) structures in place to handle absolutely anything the market throws at you.
You simply can’t fight the market, yet that’s what so many traders attempt to do. It’s a losing proposition. The only way to achieve consistent profitability is to be in harmony with it. Your attitudes, perspectives, and behaviors need to align with the realities of the market. You see, the proper mindset isn’t just nice to have – it’s essential for long-lasting market success. As you embark or continue on your trading journey, keep in mind that there is an extremely high cost, both emotionally and financially, associated with not executing your operations with discipline and consistency. So you might as well develop the mental capabilities to be disciplined and consistent in the beginning, otherwise the market will have no choice but to inflict pain upon you – either until you cut your losses and quit, completely run out of money, or realize that critical changes need to be made to your current mindset.
The market is ruthless in teaching mindset lessons. If you enter with a compromised mindset, don’t expect to leave with money.
Written by Matt Thomas (@MattThomasTP)
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