Personal finance experts say no to trading. Be it stock trading, binary trading or commodity trading. I tend to shy away from trading and never ask my readers to take up trading as a means of getting rich. The main reason being we do not manage emotions very well, as human beings. Let me explain in details, as to why trading is not good for your personal finances.
Experts say trading is less strategy but more emotions. Some discipline and some psychology. For the majority of traders, trading part isn’t hard, it’s managing the emotions, and sticking to a plan, where it is hard.
Anyone can follow charts and can guess on the overall market movement the next day. 3 out of 5 times market do behave as per charts.
Let’s assume you’re driving somewhere that you’re not completely familiar with. Often we start to wonder if we are on right route? As you keep on driving your uncertainty grows. At this time, you may turn on the GPS. When it says you’re on the right course, you become confident and move forward. Nothing has changed on the road – the road is the same, destination is the same, people and cars around you are same but you are now more confident that you’re on a right track.
It’s the same with trading. Without a plan, a plan that you can refer to and rely upon, confidence diminishes.
A novice trader falters at having no plan, no GPS system. And, experienced traders frequently falter in their inability to follow a set plan. when something goes wrong we start making guesses. We start faltering away from the plan. if the trade goes against them, thoughts come to our minds
Why did I lose money?
Why didn’t I sell quicker?
What if I stayed a bit longer?
Will the market behave the same way tomorrow?
Do I lack in stock analysis skill?
Should I pick a different stock next time?
These questions are not helpful. They prevent you from sticking to your strategy. When you have a strategy you don’t really make money every time you execute it. You lose sometimes. Over a longer period, a working strategy should give profits, but not on every trade. We forget this important aspect of law-of-average.
Like you must have the plan to maximize your profit, you should also have a plan to limit your losses. A trader shouldn’t panic with a particular loss-making a deal. You should be prepared with all the plans for handling different situation. Army generals don’t plan for the retreat on the go. A sinking ship captain does not rush to come up with a rescue plan. That’d be a stupid move as those hasty plans would not work and can cause a lot of damages. These plans are well thought, well rehearsed and well accepted across rank and files.
You can come up with a solid plan fairly easily. There are tons of literature out there that can teach you to learn trading, charting and understand trading signals.
But managing your emotions is something that’s very hard to achieve. Making this your habit requires you to train your emotions over a long time, that’s even tougher.
The financial aspects
Research showed, only about 13% of day traders make a net profit in a year. Only 1% make profit consistently over years. Data for non-day-traders should be better than 13%, but unfortunately, such data is not available.
The other important aspect is the commission on your trades. At $20 per trade average brokerage ($10 each for a buy and sell) and approximately 250 trading days in a year, if you trade only once per day, that’s $5,000 in brokerage alone you will pay. Add to it the short-term capital gains tax, which can go up to 40% of your gain.
Once I started day trading and used to pocket some net profit almost everyday I day traded stocks. Until one day in 2008, when all hell broke loose and I lost all my trading money, right on the day Bear Stearns collapsed. My stock value diminished slowly in front of my eyes and I was sitting there staring at my screen hoping for a price rebound.
I never day traded after that and now I stopped trading altogether.
You really can’t plan for a day like this, you can’t have a real strategy. But fortunately, those days are limited to a couple in a decade. There are rich traders on the payrolls of Goldman Sachs, Merrill Lynch, etc. who earn their employers millions of dollars by trading. So I am not saying that trading is impossible to profit from. You never know if you’re cut out for trading until you try.
But Let me repeat, trading is not for everyone. Whenever I tried to trade I ended up having less return than what my index and mutual funds are returning. I now invest in stocks for investment purposes only. I reinvest the dividend and try to grow my nest egg. As long as there’s no dire need, I won’t sell my stocks, provided the company continues to perform well.
Readers, What was your experience with trading? Share what you know and tell us your stories.