There’s a common fallacy out there about trading, that it’s an easy way to get rich fast. But data shows something very different. Prior to the pandemic, retail traders, or traders who buy and sell securities for their own accounts made up about 10% of the stock market’s total trading volume.
Enter the pandemic, and that percentage had increased to 30% by mid-2021 according to an estimate from Citadel Securities and Themis Trading. A large chunk of retail investors got their start during the pandemic. However, they don’t seem to be striking it rich at the rate many of them had expected.
The rise of online trading platforms including Robinhood and TD Ameritrade have made trading easy for everyone using just a smartphone. But the hard truth is that 70% of day traders lose nearly all the money they initially invest according to a North American Securities Administrators Association (NASAA) study. And in fact, only 11.5% showed the ability to conduct profitable short-term trading. It seems that trading is not the get-rich-fast strategy that a lot of new traders think it is.
You’ll Need to Assess Your Risk Strategy and Cap Your Maximum Losses
When I started my journey as an independent trader, failures rapidly followed my initial successes. My losses were significant and I started questioning my capacity to make a living out of trading. Slowly, I realized that I would need more than just expert opinions if I wanted to make money long-term as a trader. I would need data to know when to enter the market and, more importantly, when to exit.
Backtesting my investment strategies and systematically letting the system guide me on what I should put my money on — was a good place to start. My past experiences had taught me that I could lose substantial sums very fast. So, as part of my risk containment strategy, I capped my losses to a certain amount. Although the sum I was willing to lose would vary depending on the investment itself, I considered that 2% of the total sum invested was high enough.
Don’t Be Fooled By the Mirage of Instant Wealth
Minimizing risks is a good start but certainly not sufficient to grow rich in trading. Too often, I have noticed that what differentiates successful traders from those who fail over time is the scientific mindset the former have in common. They are patient, disciplined, and systematic in their approach to trading. They know that trading is very risky, and they do not neglect the slightest warning of losses.
On the other hand, outsiders and newcomers tend to see trading as an eldorado. Generally, they have two main motives for investing in the markets. They either want to improve their family returns or to generate wealth quickly. Both reasons are wrong because the illusion of instant wealth drives them.
I’m often concerned by people going on online forums such as Quora to ask whether they should buy cryptos. These people believe that they can trade and make money from materials gathered here and there on the internet. They will not realize their mistakes until they lose their hard-earned money too often.
Here are Four Reasons Why You Won’t Get Rich Overnight as a Day Trader
1. It’s easy to fall victim to scams.
Far too many people place their trust in con artists who swindle their money after classic phone call tricks. In my opinion, the reason why so many people fall victim to scams is that their appetite for instant wealth makes them vulnerable. The people behind these scams leverage our greed and our faith in the gurus of the moment.
Their phone calls generally start with questions such as your interest in the stock exchange, your sources of income, and opportunities to invest in specific areas that are trending. They will follow up with PDF documents full of logos showing that they are fully compliant with trading laws. This is a red flag as real documents generally don’t have so many logos. Another warning sign? If they promise a stable 10% return on your investment every month, you should run for your life.
2. Expert predictions often offer misinformation.
Anytime you pick up a tip as a trader, you need to evaluate its validity. First, identify the flaws and cross-check and identify the causes of the miscalculation. If you are a discretionary trader, you could potentially test these tips through demo trading. In systematic trading, this is easier because you are able to test ideas and strategies before investing money in them.
Systematic traders are similar to football coaches who can analyze, track and monitor the performance of their teams. They must understand what algorithms can be applied to which markets. For example, what applies to a highly liquid market will differ from what can be used on an illiquid market.
3. People are quick to jump in on trends like cryptocurrency with no education on how to be successful.
The opportunities in the cryptocurrency market are similar to gambling if you don’t have enough education in trading or have the wrong approach. The high volatility and the stories of people who got rich with Bitcoin provide opportunities to speculate, but the downside is that the fast movements can drag one from riches to rags. With the boom in trading, many have suffered considerable losses since the end of 2021.
Bitcoin has lost nearly 40% of its value since November 2021. It was once at $67,000, then fell as low as $30,000, and then went up again to $60,000 before going down below $30,000. Experienced traders are generally careful when it comes to cryptocurrencies. It’s important to diversify and only invest a small part of your portfolio in digital coins.
4. Many traders underestimate their risk and lose big.
Many traders just focus on acquiring the tools that will enable them to analyze markets better and make decisions faster. They often realize too late that what matters the most in trading is not the goals you have set, or even the resources at your disposal, but that you have a sound risk control strategy from the onset. Trading is a marathon, not a sprint.
The Real Secret to Success is Perseverance
The real secret to success in trading is patience and perseverance. I’ve experienced many failures in my career as an independent trader, and each time I fell down, I refused to give up as my passion for trading motivated me to keep going. Slowly, I turned failures into successes, won the World Cup Trading Championship four times, and set a world record that remains unbeaten to date.
You may not get rich quickly if you choose a systematic approach to trading, but you will become independent as you learn to build your own trading system and earn a living on the stock exchange. You will look forward to making the best out of the economic shakeouts of the future.
Image Credit: David Mcbee; Pexels; Thank you!