About 90% of who invest or trade in the stock market is not successful. So, how do you become the 10% who makes the money?
Statistics have shown that for every success story that has amassed great wealth by investing and trading in the stock market, there are a lot more people who failed to make money consistently or have given up on the market after several attempts.
Having trained and coached more than a thousand people through their investment and trading journey, I can safely conclude that there is a common trait or pattern that is, most people fail due to very fundamental reasons.
Reason #1 Starting Off With the Wrong Frame of Mind
The saddest common trait or pattern I observed was that most traders lose simply due to their frame of mind. I came across many people who buy and sell stocks based simply on hunches, news or hot tips from friends The truth is these acts should be called speculation instead of investing or trading.
Most people started out this way due to the promise of making a lot of money in a short period of time, all because they heard that someone has made the money!
The simple truth is that success in investing and trading requires discipline and the ability to manage our basic human nature of greed, hope, fear, excitement, denial as well as our big ego. To be among the top 10% of successful investors and traders, one must start with the building blocks of having the right beliefs and embracing the psychology of top traders in the world.
Reason #2 Trading without Money Management Principle
Many traders are looking for the Holy Grail, a “Sure Win” strategy.
They want to learn everything from a guru, follow exactly the steps defined to enter a trade and expect the trade to be right. So when the trade goes against them, they find it difficult to handle the feelings of failure. They will begin to doubt the strategy and may either give up or start modifying the strategy or try another strategy.
The truth is that you can make money with just 50% success rate and you can also lose money with a so-called 90% success rate strategy!
“ Never risk more than 2% to your capital in any single trade..”
When I first started out trading more than 10 years ago, my results were inconsistent. I could gain a lot and then lose it all back within a few trades until I learnt of this Golden Rule in investing and this is one rule that I cannot stress enough in my teachings.
Many people when told of this rule would say, “My capital is not that big and 2% will not allow me to trade any stocks!”
While that may be true back in the days, the development of financial market and technology has changed that. Today this rule can be achieved by either having an automated stop loss or for more advanced traders by using hedging strategies. The availability of leverage instruments such as options, contracts-for-difference and futures allow us to trade with very much less capital.
Making money consistently is all about risk management being your first priority; profits secondary. If a trader thinks about how not to lose money first, he will then focus on managing risk of his trades.
Reason #3 Trading without a Plan
Trading without a plan is planning to fail at trading. The question is, “How should one plan for their trading?”
Dynamics of a trading plan
- A trading plan should be designed to meet one’s financial objectives. Hence, the objectives must be clearly defined. For example, if one desires a 30% return per annum based on a $10,000 capital, then the plan has to be based on the 30% returns per annum objective.
- A trading plan will be a reflection of a person’s personality and time availability. I have met traders who tried to use short term strategies or even day trading strategies without realising that their personality or time availability are better suited for medium and long term strategies. From my observations it is very difficult for a trader who is trading against his personality nature to have any consistent success.
- A trading plan should also include clear entry and exit criteria that govern every trade. This would mean every trade must be opened and closed according to what has been defined in the plan and not based on intuition!
- A trading plan must consist of a series of actions that can be repeated on a regular basis. In my own trading plan, I have a four-step method which I repeatedly use and I call them the S-T-P-M formula:
S = Selecting the right stocks
T = Time for the entry and exit
P = Protect my investment
M = Multiply my returns
Therefore, for each and every trade I make, I follow these four simple steps.
- Lastly, a trading plan must include a good journaling of all your trades. A good journal will help you in:
- Reviewing your actions regularly to make sure you have followed your strategy, not your emotions.
- Making sure that you learn, especially from your losses. I see every loss as a tuition fee I pay to the market.
– Kathlyn Toh, Founder of Beyond Insights: Stock Market Trading & Trading Course Education