Advice to Novice Traders
When it comes to novice traders, where would be one of the key areas you see them slipping up, and what would your advice be to overcome these setbacks?
There are probably a few areas where people slip up when it comes to trading. Let me talk about two in particular that don’t get spoken about a great deal. First of all, commission drag. I think it’s a key reason why a lot of people fail. A lot of people come into the stock market, even when they’re well capitalised, and say “I’ve never traded before so I’ll just start with $3,000 or $4,000, and see how I go.”
When you’re paying a broker $20 to buy, and $20 to sell, it doesn’t actually take a huge amount of transactions to chew up your account, or a significant amount of your account.
I had a gentleman in the office recently. He wanted to buy this whiz bang trading system that was being pushed online, and I showed him that if he bought the strategy he needed to make 22% per annum just to break even. Not even make a profit, just to cover his costs. And the simple reason for that was the quantity of trades the strategy was doing, the broker that he had to use, and the commission drag that the strategy created. He had to make 22% per annum just to cover those costs. Now, I don’t care how good you are, 22% per annum is a big, big ask, and if you’ve never traded before it’s an impossible task. So he had to go away and have a good think about whether he changed brokers, which he really didn’t have an option as the strategy required him to use the seller’s broker, or he included more capital so that drag went down.
I think a lot of people come into the business, and do not understand that these peripheral costs can actually chew up the account significantly, and make it almost impossible, mathematically impossible, to be successful.
The other reason that people fail is they simply don’t understand what the journey entails. Trading does entail losing trades. It does entail periods of time when you will be losing money. And it may entail having a losing year. It’s very, very difficult for the average person to accept that they can place trades for a whole year, and have a losing trade, or have a losing year. Until they accept that, they’re going to find it very, very difficult to be a successful trader.
Sure I would like a strategy that makes money every day, every week, every month, every year, as anybody would, but it doesn’t exist. I’m a realist. I understand losses. I think if people take a longer term view of applying the strategy rather than micromanaging a strategy, and trying to avoid bad periods of time when they come along, they’ll be a lot more successful.