Everyone has the potential to learn to trade. But learning to trade has many traps that turn intelligent, successful people into willing losers is familiarity. For example, with commodities, you're just trading things that you grew up with like gold, silver, wheat, soybeans, cattle, and sugar.
Or futures contracts, where it's simple enough to understand how to control contracts with only a marginal investment. It's all quite familiar. Trying to learn commodity and futures trading does not seem such an uphill task.
So you find a broker and open an account. As you go through the disclosure documents, you acknowledge the risk involved, you're warned to only trade with money you can afford to lose, not to use borrowed money or money that, if lost, would affect your livelihood or ability to provide for your family. Yadda, yadda, yadda. The NFA is looking out for you so you send in your money and fund your account.
And there you are, money in hand with big dreams and high expectations because your broker has just shared a particular strategy, complete with charts, recommendations, and the markets that he's watching.
Side note: if you went straight to electronic trading, then you've had to learn trading without broker assistance, and that can amplify the effect of the trap. Keep reading.
So, you've acknowledged the risk and digested as much information as you can in a short period of time. Now you're ready to place your first trade.
When a good one comes along, you jump in. You're excited. You're watching that trade, the markets, and the news with great anticipation. You're watching and you're learning. But as time goes on it begins to dawn on you that there's a whole lot more to this trading business than you first thought.
Actually, there's a lot more.
But it's too late. You're hooked. And now it doesn't matter what happens on this first trade because you've seen the potential and you know the money's there for the taking.
But, before long, you experience some or all of the events that inevitably occur to new traders:
• you get stopped out then watch the market run the direction you predicted--except you're out.
• you hesitate to enter a trade, and miss out altogether, or miss out on the profits.
• you hang onto a trade too long and watch your profits disappear
• you continue to hang onto a trade until it becomes a large loss
• you sit on the sidelines and see other markets running, knowing the huge money that's being made during this time.
A torrent of emotions may come into play: anticipation, excitement, anxiety, greed (my mouth actually watered the first time I saw my contracts doubling), fear, regret, anger, blame, elation, shame. The list is long, the emotions are powerful, and they pull you further into the trap.
Very soon, you've had several trades lose money. You're frustrated, things aren't working out like you expected. The chart patterns are confusing and the indicators have let you down. You start to lose the desire for learning trading. But hold on, you're competitive. You know you're smart enough. And you want to win!
You look around for new indicators. You begin to deviate from your system. You're searching the Internet and bookstores for a system or strategy that will give you the edge to beat the markets. And at this point, unless you have ice in your veins, the trap has been set. You're caught.
Okay, I've laid out the typical progression in the life of a new trader. Does any of it sound familiar? I've mentioned several components that, working together, empty the accounts of hundreds of thousands of astute, intelligent people every year.
The trap is right in front of you. I'll spell it out. Lodge into your mind these 5 components of the subtle (mental) trap of trading and learn to trade like a superstar.
1. Familiarity with what's being traded.
2. Risk disclosures and a focus on risk.
3. The implied simplicity of trading.
4. The implied notion that trading is investing.
5. The fact that you can begin trading without any training. (Very few traders are taught how to plan a trade before entering their first trade.)
Avoid these components and you'll be well on your challenging way to learn to trade.
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