There are too many people that risk a large portion of their wealth to start trading on the stock market, without even having a clue of what trading is about and what are the risks related to it.
This happens usually because they may have seen it advertised and promoted as an easy way to make big returns in a short time and with little effort.
In fact, there is an infinite number of “gurus” that publish videos online, where they are in luxury villas close to the ocean, on an island in the Caribbean. What they do all day? They trade on the stock market, by using small laptops, near the swimming pool, for 4 hours a day.
The problem with these so-called “experts”, is that they portray this activity as something that anybody can do, with little effort and little money, just by following their $1,000 online course. Well, that’s not really how it works…
Making consistent positive returns with trading is hard. You cannot do it by laying down on the beach with your cheap laptop, it is a complex activity where you have to master at least these 4 topics: probability, statistics, finance, and psychology.
This is why I think that most of us should leave trading to the professionals. It is not for everyone, it requires years of practice, many hours of study, consistency and the ability to control emotions. All this should also be combined with a decent amount of money to invest.
If you open a trading account with an insufficient amount of money and you expect to make a living out of it, you will need to take more risks and to increase leverage. Those are two key ingredients for a recipe that will almost certainly lead to financial ruin.
Moreover, as I said before, psychology and the ability to control emotions like fear, and euphoria, are at least as important as technical knowledge.
Together with consistency, they are not skills that can be learned by reading a manual, or by attending a course, they are for a good part innate qualities. If you do not have them, it is hard to acquire them later on.
Lastly, you have to master statistics and probability, this because trading is usually based on small short-time bets, where the trader tries to earn by creating a small advantage, which becomes more relevant in the long run, after placing hundreds of bets.
What should you do instead
As we have seen, contrary to what many advertisements want to make-believe, trading is hard, complex, and not for everyone. It is not sufficient to have good intentions and the motivation to spend hours studying, that will surely be very useful, however, you need also many other attributes which are not easy to create later.
Moreover, it has to be considered as any other profession, therefore you will need to spend many years of practice to learn how to be consistent with it, as well as becoming a doctor, or a lawyer requires many years of studying and practice, becoming a trader is not different.
These are the main reasons why it is not the best way for most people to generate returns on their wealth in financial markets. They should start to invest their money for the long-term, by purchasing single stocks, or by adopting a more passive approach, by purchasing index funds or bonds.
This approach to financial markets, with a longer-term horizon, helps to reduce the impact of emotions and to increase the relevance of the analysis that we make. Moreover, by investing in the long-term, we can benefit from the wonders of compound interest and from the income generated by dividends.