Why Is Trading So Difficult? - Reason #1
Published April 2nd, 2008 in TradingTrading is deceptively simple.
After all, there are only 3 kinds of trades, and thanks to today’s technology, anyone with even a small amount of money can open an account, be linked to the exchanges and start sending off orders in no time.
But that doesn’t mean making money through trading is easy. On the contrary. It is probably one of the most difficult, frustrating and challenging undertakings you can imagine.
So why is it so difficult?
Of course, there isn’t a pat answer for such a question. So I’m going to explore this in a series, of which this is the first.
One of the primary nature of trading is that it is a waiting game. Most people, especially those new to trading, imagine it is a frenetic exercise in yelling “Buy, buy” or “Sell Dammit!” into the phone or a flurry of keyboard presses and mouse clicks. I suppose they have this perception of trading from Hollywood.
In reality, trading consists of long bouts of (near) boredom, interspersed with spikes of adrenalin induced action. This makes trading extremely demanding, physically, emotionally and intellectually. Let me use an analogy.
A cheetah can instantly unleash an unbelievable amount of energy, reaching speeds of 100 km/h and more, faster than any of its prey. But such acceleration and speed requires restraint and responsibility.
A cheetah must stalk its prey, choose a specific one and then get as close as possible before initiating the case. In spite of its superior speed and agility, without these prerequisites, it faces failure.
Similarly, a trader can, with a click of a button, send an obscene amount of capital into a trade. But if s/he hasn’t done their homework, of what use is the instantaneous execution of their order?
So a trader must first watch, single out opportunity and then act. But this requires a special blend of patience and decisiveness. Most of us are good at one or the other. Some are very analytical and others very action oriented.
The ideal trader has a constitution that blends both harmoniously: they are patient and serene when scanning the market but when they spot an opportunity, they act quickly and decisively. They are able to stay alert and perform at their peak even during the “boring” parts.
Too much observation and analysis leads to missed opportunities. And on the other end of the spectrum, hyperactivity without forethought leads to taking too many trades and wasting your capital on unworthy ideas.
So how do you know when to be patient and when to take action? That depends on the type of trading you’re doing and what sort of trading plan you’ve set up for yourself.
You do have a trading plan, right?
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Very nice post. I only have one little argument. You say:
“In reality, trading consists of long bouts of (near) boredom, interspersed with spikes of adrenalin induced action. This makes trading extremely demanding, physically, emotionally and intellectually.”
I think this applies much more directly to short-term traders and much less to longer-term ones. Generally, the more frequenly you have to make those trading decisions the more demanding it will be, and vice versa.
I trade in several timeframes. When it’s more the position stuff that I hold for weeks things are quite relaxed.
John,
yes, you’re right. I should have written that it much more relevant to intra-day trading but then I thought that was obvious.
No worries. I work with a lot of new and developing traders, and have found that being specific is VERY important. You can’t make ANY assumptions because they have this tendency to take everything literally.
Babak,
Excellent post. I am an overspent cheetah, trying to hit anything close to me at the time. Looking forward to the next in the series.
Oh my God, you are so right–I only wish I had read this 4 years ago, then I wouldn’t lose so much capital. What you said is exactly what I’ve learned during the past 4 years. Now I’d say I’m a baby cheetah who is still learning how to be more efficient, how to catch the most with a minimum energy…I love trading and have fun doing it, so I’m sure I’ll be a real cheetah soon…thanks a lot, you must be a brillient one already.
Hi Babak,
This is only true of daytraders, particularly those at prop firms. It is not at all true of bank traders at prop desks or portfolio managers at hedge funds. They see the time in between trades as when the real work of analysis, sythesis, and understanding take place. So, for them, the not-trading parts are not boring at all. They love figuring out markets. It’s the daytraders who find inaction to be boring, because (by nature for the most part), they are inactive conceptually. If someone views inaction as boring, they won’t find the harmonious blend you write about. They’re wired wrong.
Brett
Good post! I am a NYSE day trader and I have always lose money because I did not do enough homework.
Just for your information, I just started a carnival on Equity Trading.
Thanks.
Nice post. I am new to trading and am still trying to formulate a trading plan. I wanted to test my skills first and see if I had any innate ability….$1200 poorer I am back to reality haha. It is difficult and there is alot of information, but I am determined and curious and I wont give up and at the ripe age of 22 i think time is on my side.
Stephen, Thanks. You’re young and hungry. That’s a good starting point. Don’t miss: The Definitive Guide To Trading Mastery & Success.