What is the Secret in Trading – Cultivate the Proper Perspective on How Markets Work:
Most people think that their individual trading success is at the mercy of rigid odds. Since over 90% of traders fail, you might think you have virtually no shot at succeeding. But the overall success rate is low in any skill-based, peak-performance endeavor.
In my opinion, the trickiest part about trading is that the markets are open to almost anyone. In fact, there are no barriers to entry based on skill. You might be limited in brokerage options based on age and geographical location, but not based on aptitude.
This lack of know-how required to open up a trading account, along with how effortless it is to click a few buttons to place trades, in addition to the possibility of making large sums of money within minutes – all makes trading seem like an easy undertaking.
But durable, long-term trading success is anything but easy. The concept of achieving it is simple, which will be explained below, but it requires hard work and training. Good trading by professionals is drastically different from bad trading by amateurs.
One one hand, it’s great that brokerage platforms like Robinhood have democratized access to financial markets. But on the other hand, this has resulted in a substantial number of market participants who have no real idea how to properly trade or invest.
The Secret to Trading Success is the Alignment of Your Market and Mental Frameworks:
In most cases, when people ask for the secret to trading success, they’re typically looking for some magical indicator or foolproof system – a shortcut to riches. But unfortunately, these things don’t exist – no matter how much we try to chase them.
This is the classic example of a new, inexperienced trader having a mental framework that is completely out of alignment with true market characteristics. Since the market is inherently dynamic, impersonal, limitless, and uncertain – nothing can ever be guaranteed.
But that doesn’t mean it’s impossible to make money in a consistent, systematic fashion. As chaotic and random as the market may seem, there is still some order to it. Professional-level traders have two main methods for stacking the deck in their favor.
1. Building Legitimate Trading Skills For Self-Sufficiency
The first way successful traders put the odds in their favor is by developing legitimate trading skills. Most people just treat the market as an opportunity to gamble and make money by sheer luck or chance – but don’t confuse luck with skill.
Unfortunately, there will always be individuals who throw their entire life savings into one speculative investment and win big – which is great for them in that instance. But this lack of risk and money management typically comes back to bite them in the future.
The point I’m making is that there’s a big difference between one big win by chance and gradual, consistent growth over time. The first is attractive, but it’s just gambling. The second is the sign of an actual trader with a dependable, repeatable process.
So if you want durable trading success, you have to treat the craft with the respect it deserves by building legitimate technical, analytical, and mental skills. Unskilled market participants can make money sometimes, but often can’t keep it.
2. Finding or Developing a Statistical Edge For Positive Expectancy
The second way successful traders put the odds in their favor is by developing a statistical edge. In other words, they develop strategies and systems with positive expected value. Losses are unavoidable, but over time the probabilities play out in their favor.
This is exactly how casinos operate. You might wonder how they can afford to pay out all the winners, but every game they offer puts the odds in their favor – as slight as it might be. Over a large number of spins, rolls, or hands – the house always wins.
A simple example I like to use is to imagine a fair coin flip with 50/50 odds. But if it lands on heads you make $20 and if it lands on tails you lose $10. Although it’s possible for tails to come up multiple times in a row, this is a bet you’d want to take every time.
Where traders tend to struggle the most is not necessarily in finding a statistical edge, but being able to follow it through streaks of losses. As nice as it would be for every other coin flip to be heads like 50/50 odds suggest, probabilities just don’t work that way.
The Secret to Trading Success Requires Skill-Building and the Refinement of a Statistical Edge:
As simple as it sounds – building skills and having a statistical edge – most market participants simply don’t do it. They make trade and investment decisions based on impulses and hunches, ultimately leaving their results up to sheer chance/luck.
But what usually happens is that people experience high amounts of emotional and financial pain from poor trading decisions – and only then do they consider that maybe they should have developed some skills or actually stuck to opportunities with proven edge.
But there’s always that one big trade that can potentially be the exception to the rule. The trade that you can go all-in on and achieve financial freedom. This is the type of psychological trickery that leads us into repeating the same mistakes over-and-over again.
Overall, trading is a skill-based, peak-performance endeavor. And almost all of that skill and performance is mental – which is difficult for new traders to understand and quantify. But it can’t be ignored if durable market success is the ultimate goal.
Repeatable, long-lasting success can’t be achieved by traders without the proper combination of market and mental frameworks.
Written by Matt Thomas (@MattThomasTP)
- What is the Foundation For Stock Trading Success?
- What is the Best Trading Psychology Course Available Online
- How to For the Stock Market – 5 Steps to Consistent Profits
- What is a Statistical Edge in Trading – Expected Value Explained
- A How to Guide For the Stock Market – Achieving Consistent Profitability