I will continue to post articles for beginners here. What are the things to watch out for, the basics etc. Hope it is useful for those who is just starting out their way.
Not that I am a master sifu already. It just that when I started i made many mistakes, and I am just gonna list them here to save everyone's time. and Money. so here's to our survival!
Basics: Why is Trading Difficult
I will attempt to describe and highlight a greater obstacle to success in the financial markets. The answer: it is us, ourselves, or rather, our natural inclinations when we trade and invest, that is the greatest obstacle to success.
Consider this: the great Japanese private trader CIS, who has amassed a personal fortune of more than USD 150m in more than 10 years trading his own account. When asked about what what was his secret, he had this simple answer:
"Buy stocks that are being bought, and sell stocks that are being sold".
I am guessing some of you may be smirking after reading this. But CIS is not alone in saying this. The great Paul Tudor Jones had said something similar: " your job is to buy what goes up and sell what goes down". I may be paraphrasing. But it is really as simple as that. But is it that easy to do so in reality?
If we take a moment now and reflect on our trading or investment decisions. Think of the number of times we have thought to ourselves: the prices have gone up too far, let's wait for the correction before we buy. And then only to watch those stocks go up higher and higher. And those times that we think to ourselves, well these other stocks haven't moved yet, let's buy these laggards. And only to watch these laggards continue to languish, while those that are moving higher continue to make new highs?
Why can’t we simply buy the stocks that are moving higher?
Sometimes, in trading or in investments, the rules are very simple to express, but very hard to follow. A little bit like this other thing called life. But what is stopping us? Because what we are trying to do is, for lack of a better word, counter-intuitive.
Take for example, let's say, we are buying toilet paper, or fish fillets. We like to wait for a sale, and we are always looking to buy the cheapest. In fact, as the stores offer more discounts, we will end up buying more toilet paper, and fish fillets. This is very natural. But if we do the same in financial markets, this behavior, or habit, will kill us.
Incidentally, Tom Hougaard in his excellent book " Best Losers Win" uses the toilet paper example to explain our natural urges. It is a very good book that gives practical advice on how to develop the right mindset to trading the markets. I highly recommend it.
So how do we go about to overcome this obstacle? For a start, one must be aware of such self-defeating tendencies. Next, we can modify our approach, or develop new rules to be incorporated into our trading plans to counteract such inclinations. All in all, I urge those of you who have just started your trading and investment journey, besides learning the how-to, the technical indicators, getting understand the fundamentals and etc, please spend some time studying your own natural inclinations, urges, emotions when you make those investment/trading decisions. Start a journal, do post trade analysis, meditate, do yoga, contemplate or whatever. The earlier you incorporate this self-analysis, especially with respect to your emotions and natural inclinations, the quicker you will be on the right path.
So til then.
