Avoid The Retail Trading Trap

My Start

In 2003 my mentor introduced me to the book Mark Douglass "Trading In The Zone". Before I learned any of the mechanics of buying and selling, before I opened an account with a broker, I was absorbing every word of Trading In The Zone. The book emphasizes the mental fortitude and introspection required to consistently trade well. Trading In The Zone is not a book on how to trade, it emphasizes the mental preparation for the emotional swings every trader will experience, learning to take personal responsibility for every trade outcome both positive and negative; particularly for discretionary traders.

After making my first trade, the genie was out of the bottle, let's call it beginners' luck, my first trade was a winner. When trading highly leveraged futures contracts, $300 or a $1,000 with in the hour was intoxicating. I had real thoughts of quitting my job and trading full time, thankfully I came to my senses and did not quit. For the next decade I continued to trade futures and later learned to trade options both with inconsistent results.

The Retail Trader's Trap

During the California Gold Rush beginning in 1849, one of the most consistent businesses was selling products and services to gold miners seeking riches, Levi Strauss was most notably known for going west following the Gold Rush when he opened his general store selling dry goods. Today, the modern day Gold Rush orbits around becoming the next social media star, tech entrepreneur, and undoubtedly a highly successful trader. Brokers have become the new general stores for retail traders in pursuit riches.

The rise of Fintech has expanded on the idea to a new generation of retail traders with the lure of possibly becoming rich. Companies such as Robbinhood seeks to capitalize on this multi billion dollar industry catering to small retail traders. Unfortunately, most retail traders are unprepared for the reality of how discretionary trading impacts decision making when real money is at risk.

Their is no mental preparation, book or class that can be purchased that would adequately prepare a trader for the emotional roller coaster they will experience with discretionary trading. The industry pedals the idea that just if the retail trader who works hard enough, or uses the right strategy, that they will be part of the 1% of traders who consistently are profitable.

The Truth

Trading in the markets is not for most people. Trading requires capital that if lost, it will not impact your current standard of living. Trading as a means to pay for necessities such as a mortgage is putting

an extraordinary level of unimaginable pressure on every decision that is made, it is unfair to expect a level of consistent success in volatile markets. The other hurdles in the way of consistent profits are the institutional traders and hedge funds who are able to leverage their immense capital, personnel and computing power to consistently outperform and take advantage of most small retail traders who attempt to participate in the financial markets. All it takes is one trading mistake in discipline to ruin a trading account, that has caused many professional traders to cause their trading to spiral out of control. The legendary trader Jesse Livermore is both an inspiration and a cautionary tale of the dangers of trading.

Market Performance

It is widely understood that beating the market is not common among most active traders. And yet we still try hoping to be one of the few that can manage to put all of our experience (bad trades) and resources (money) together to finally emerge on the other side consistently profitable. The average Dow Jones return has been over 5%, the average retail trader can benefit from this is they are able to manage how and when they participate in the market. Trying to predict what will happen next is horribly inconsistent for most, this is why I advocate for a different approach to participating in the market.

Systematic Approach

The ability to pick and choose when to buy or sell is a real skill that when developed can prove to be extremely profitable. In my experience, the level of concentration and consistent focus consumes a lot of personal time, patience and cognitive capacity that could be used else where in your life. Trading is not a get rich strategy, despite all the slick marketing, it is better viewed as one of multiple streams of income. There is a different way to participate in the market without relying on discretionary trading. A systematic trading method that removes the burden of selecting what to buy or sell allows for more time allocated to managing the risk, not to mention reclaiming your personal time.