Like any challenging pursuit with a steep learning curve, trading requires an incredible amount of determination in order to succeed. If we are successful, there is the temptation to look back to our beginning and to shake our heads at our combination of naiveté and the youthful enthusiasm that allowed us to overcome it. While reminiscing, we can also ask ourselves: what lessons did we learn along the way that we wish we had known earlier?
Without further adieu, here are the top five lessons that a beginner can learn:
- “A Hard Way To Make An Easy Living”—There is a saying among poker players that it is a hard way to make an easy living. While sitting at a table and playing cards is not physically tasking, the real difficulty lies in the ups and downs of your chip stack; the exhaustion that comes from concentrating intently for hours at a time; the psychological struggle of making a statistically sound bet, only to lose to a card flip that had a minute probability. Trading is quite similar. Viewed from the outside it can seem like traders are just playing a mindless video arcade game. However, that disguises the extraordinary amount of skill and effort required to be profitable, let alone to be one of the greats. Moreover, the mental and psychological strains can be enormous, especially when you are just starting out and trying to get your bearings. Much like poker, you need to be prepared for the arduous route towards success.
- 2. Good Trading Is Anything But Glamorous—While a lot of people are drawn to trading by charismatic figures like Gordon Gekko or the madhouse atmosphere of Liar’s Poker, they are often disappointed by the reality. Good trading requires early starts, long hours, intense concentration, earnest preparation, and taking superb care of one’s body and mind. Late nights, showboating, and extravagant lifestyles have no place in the lives of most successful traders. The people who are initially attracted by the frenetic pace and energy of trading often end up quitting, disappointed by the intense and methodical pace that is required for success.
- Risk Management Is The Key To Making Big Money—A famous Scottish proverb goes, “Take care of pennies and the dollars take care of themselves”. This is something that successful traders know and starting traders wish they did. While a lot of beginners take on excessive risk, trying to get rich in a hurry, they are often setting themselves up for failure. The successful trader knows to take small amounts of risk on each individual trade, never putting himself in a position where he can blow up; to seek winners that are bigger than his losers and to have a decent winning rates, knowing that the probabilities will work in his favor; to add to his equity every year, as it can compound significantly over time. While a successful trader will likely not triple his account in a short timeframe, he will always stay in the game and make significantly more over the long haul.
- All Gamblers Die Broke—There is an old adage that all gamblers eventually die broke. By definition, a compulsive gambler is always looking for “action”—to bet, even if the odds are not in his favor. Unable to control his compulsion, he will keep betting and keep losing. Good trading is the polar opposite: disciplined, cautious in its approach to risk, and demonstrating a clear edge. We can rescue ourselves from the gambler’s fate by vowing to “bet” only when the odds are in our favor; by risking small amounts on each trade; by always keeping aside money that we will not put at risk. The results of successful trading are profitability and wealth accumulation, worlds apart from the gambler’s fate.
- Learn From The Greats—Beginners are looking for “hot tips” or the next “sure thing”. They would be better off learning from the greatest traders. A lot of famous traders, like Bernard Baruch, Jesse Livermore and George Soros, have written books or done interviews that contain important lessons for beginners. Their words may sound cryptic, but they are golden if you’re trying to improve. Some of my favorites include:
- “The big money is made by sitting, not thinking”—Reminiscences of A Stock Operator
- “I would say that risk management is the most important thing to be well understood”—Bruce Kovner, Market Wizards
- “Don’t ever average losers”—Paul Tudor Jones, Market Wizards
- “Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money”—Ed Seykota, Market Wizards
- “Wait for the fat pitch”—Warren Buffett
What we can learn from these quotes are the rules of success for trading—basics like cutting losses, letting winners ride, and only trading when you have an edge. But more importantly, we get a glimpse into the mindset of an excellent trader—how they think about markets, positions, and what they are trying to accomplish. Ultimately, assimilating the thought patterns of great investors is the best way to become successful ourselves.
While investing can seem arduous at first, we can find immense joy in success. Certainly that enjoyment derives from being profitable. While the truisms listed above will help you to earn more, they are also a product of a journey to success that was its own reward.
By Bruce Bower | www.howoftrading.com | Twitter: @HowOfTrading
6 Comments on “Five Things I Wish I Knew About Trading When I Started”
Gamblers Die Broke.
J Livermore Died Broke
Therefore: J Livermore was a gambler
Your advice: Avoid being a gambler.
Why do you use Jessie Livermore as an example. He is a gambler.
You cant have it both ways.
Correct your incongruency.
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TV i agree with you that J Livermore was a gambler and that he died broke, like all gamblers. He is probably a great example of “Do as I say, not as I do”. I included that quote because it is a great saying and we would all do well to live by the quote.
As for Mr Livermore, he is quite an interesting case study. I re-read Reminiscences of A Stock Operator recently and think that there is a lot that we can take away from him about the psychological side of trading, specifically, how to curb the gambling and self-destructive tendencies that led to his going bankrupt several times and ultimately committing suicide. Livermore illustrates well that there are two stages to being successful as a trader– making money and holding on to it. The making money part is well covered, with lots of about techniques, etc. The second part, about holding on to it, is ultimately more about psychology and spirituality, and is not covered well at all. I am outlining a post with more on that.
Thanks TV, I am always happy to respond to feedback!
Cool!! I’ve been rocking it in the markets over recent few weeks. There’s been lots of stocks to choose from and lots of them have gone up. Better jump in while you can!