Imagine a job where you can make a stupid amount of money with just a few well-timed clicks. Trading is one of a very few number of jobs where this is possible. That's why it's so alluring. With a bit of capital and mental aptitude, anyone can trade and potentially start making huge amounts of money. Most people think they are smarter than average.
I've personally been trading for over 4 years now and have experienced my ups and downs. Fortunately, I've trended upwards having incorporated all the learnings along the way back into how I trade. For example, two new trading strategies that I've developed have returned 20.11% and 20.21% since July and September respectively.
Here's my take on how an inexperienced trader can become consistently profitable, without getting lucky.
You can't get rich quick
Unless you're extremely lucky, you're not going to get rich quick from trading. Most people who approach trading with a gambler's or lotto buyer's mentality end up losing money. If you decide that you want to make money from trading, be prepared for a long and grueling journey of successes and failures. Overtime, as you learn from your mistakes and incorporate the learnings back into how you trade, you become better and better at trading, until you finally start consistently making money.
🧘 Emotional control is key 🧘
Successful traders are masters of their emotions. People generally underestimate how emotional trading gets until you experience situations such as:
- You bought a stock that proceeds to tank hard. You're stressed about the unrealized losses. Do you hold and wait for it to go back up, or do you take the loss?
- You decide to take the loss, and immediately after, the stock goes back up and even above your original purchase price. You're frustrated. Do you buy again (revenge trade)?
- You bought a stock and it's flying, do you sell now or hold for more gains? If you decide to hold, how will you feel and what will you do if the stock falls and you now have unrealized losses? If you decide to sell, how will you feel and what will you do if the stock continues to go up?
- After months of continuous small successes, you make one trade that goes in the red and wipes out all the previous months's gains. How would you feel, what would you do?
- ...and countless other emotional and high stress situations that you'll encounter while trading
How you react to these stressful situations is a large factor in determining your success as a trader. Can you objectively make decisions in lieu of significant emotional stress? Inexperienced traders often give in to their emotions, and make poor choices like revenge trading or doubling down on a losing trade. Emotions cloud our judgement and unfortunately, in an activity where you want to be as objective as possible, you experience a lot of them.
It's important to keep in mind that the market is huge and will exist for a long time. There's no reason to be stressed out by a single opportunity or mistake, when there are so many more opportunities in the future. If one trade didn't go as well as you'd like, a new one is bound to come by in the future. You just need to be patient.
A good trader seeks out ways to control their emotions, such as through meditation or therapy.
Learn fast. Never stop learning
The market is a highly complex machine. Internally, there are so many different participants with access to a wide variety of mechanisms that can affect prices. Externally, any macro event could move the market in significant ways. Ignorance is not your friend when you're trying to get ahead of the market. For example, a losing strategy is trying to buy growth stocks in a rising interest rate environment.
The market also moves quickly. Participants can move large amounts of money near instantly. Macro events can happen suddenly, such as a global pandemic or a sudden escalation in trade tensions.
As such, a good trader not only needs to invest heavily in learning at the start, to establish a baseline amount of knowledge, but also needs to continuously learn as fast as possible to keep pace with market changes.
Habits, habits, habits, and the right tools and processes
There are a huge amount of tools and information sources about markets on the Internet. A good trader picks and chooses an optimal set of tools and information sources that fit their trading style and incorporates them into a well-designed learning process that they habitually repeat and continuously adjust.
For example, a very simple process could be checking the Wall Street Journal and Reddit in the morning for news, before trading.
A better example is Keith Gill's (GameStop multimillionaire) process of using complex spreadsheets to manage and evaluate the stocks he's interested in, as well as a series of websites that he uses as part of his research process to find stocks to invest in. I wrote detailed summaries of Gill's process in these articles: What is DeepFuckingValue's (GameStop Deca-Millionaire) Investment Style? and Do This Now to Trade Like DeepFuckingValue (GameStop Deca-Millionaire).
Start small, then scale up
As a trader, you can lose a lot a money really quickly if the market moves against you (for example, UPST fell 20% after earnings recently). Don't be an Eager McBeaver when trading, especially when you're just starting out or trying a new strategy. The key here is realizing that you learn the same amount trading $1000 instead of $100000, while taking on significantly less risk. Like most activities, you're usually not successful right out the gate, so you should maximize learning and minimize risk at the outset. As you learn, get better, and confirm something works, you can scale up your position to match your growing expertise.
Find an edge. Be creative
You don't have to be a clairvoyant to make money in the market. With so much going on, there are often exploits that allow you to consistently make money. The challenge is finding these exploits. For example, Carl Icahn and Steven Cohen (two famous billionaires) both had their big break not by predicting prices, but through options arbitrage.
Tom Dante, a trader popular on Twitter, has quite a few stories of creative trading exploits he's seen in the past. For example, in his early days, he found a broker who's price slightly lagged other brokers and he'd abuse this lag to make money. Another example comes from his experience in prop trading. One peer prop trader revealed candidly that he'd take notes on every other trader in the firm and trade based on their mistakes. If a fellow trader consistently lost money, he'd always do the opposite of what the trader did.
A good trader tries to be as creative as possible to find exploits and develop new trading strategies. A saturated trading strategy is an ineffective one, while a novel and unique strategy is effective.
Social media is your friend
Although social media has a lot of noise, there're also many diamonds in the rough. Traders like to talk and they like to teach, since there's often a lot of time between trades. Seek out the cream of the crop on Twitter and YouTube and learn from what they have to say. I've found Twitter to be great for news, bite-sized analysis, and trade ideas, while YouTube is filled to the brim with tutorials on how to get better at trading.
Be wary of those that try to sell you knowledge, or even get-rich-quick trading strategies. They tend to charge exorbitant prices for basic information. And it also never makes sense for someone to sell a profitable trading strategy, since if it was so profitable they wouldn't be selling it. Even if they were honest and the strategy actually works, keep in mind that a saturated trading strategy becomes an ineffective one.
Trading may appear easy on first impression. You just need to hit two buttons to make money, "buy" and "sell", but the devil is in the details. For most people, it's a long and arduous journey to become a profitable trader but the rewards, if you make it, are plenty.