How many people who trade make money? Is it 20%? 10%? Even 1%…?
You can pay hundreds of euro for a six-week trading course, thousands if you really want to, promising to unlock for you the secrets of the financial markets. There are countless trading books you can read. You can listen to journalists, analysts, economists, CEOs, hedge fund managers and chart readers all day long on CNBC and Bloomberg TV. You can watch great movies like The Big Short which explain what was blindingly obvious in the subprime mortgage market to a select few (while the majority of the world remained oblivious). You can open a spread betting account with firms who advertise with Premier League clubs. Or who hire ex-Bond villain movie stars to glamorise the art of trading, as they buy and sell on their smart phone while chauffeured about town in their limousine. But how many people who trade really make money?
A good place to start looking for the answer is a report by the UK’s Financial Conduct Authority in 2016. They found that when it came to CFDs (contracts for differences), a popular spread betting account trade, 82% of customers lost money, for an average loss of £2,200 per account. I’m willing to further speculate that of the accounts that do make money, many of them are not generating profit much better than zero. If you spend three hours a week managing your account, and you end up with a profit of €270 at the end of the year, can you really say you are making money trading?
With leveraged limits as high as 200:1 on account capital, it’s no surprise the FCA has been trying to crack down on the amounts ‘clients’ are staking. No surprise also that the major spread betting firms themselves took a 35% market cap beating (at least) when the announcement of a crackdown by the FCA was announced. With hundreds of thousands of client accounts on the books, that’s a lot of people losing money trading.
So how do you tilt the odds in your favour? If so many people lose money, how do you avoid the losses and get your money working for you?
Just don’t get your money working for you at all in the beginning. You don’t need to lose a red cent of your money to hone your skills of trading. Many of the online brokers and spread betters offer demo accounts where you can log on, buy and sell shares with monopoly money, and never risk financial pain. That’s not to say figuring out the puzzle of the markets is free. Far from it. You’ll be investing the most valuable asset you’ve got going for you – time – and time is what you need to invest in order to become a consistent, profitable money-maker. So what if you miss a big trade you had on a Bitcoin hunch? Or if you only make €200 of monopoly money profit on that great call you made on Ryanair stock the day of their earnings report? If you know your stuff, your stats will tell you that. When you get to the stage where you can make repeatable profitable trades, over a reliable sample size of trades, then you know you’re ready to trade real money. Sounds like not much fun? Then maybe you are looking at the wrong past-time. At Positive Equity, nobody without experience trades real money until they can prove they have trading consistency in a simulated trading environment.
Join a professional trading firm. Here’s the sales pitch. Becoming a consistently profitable trader takes time, effort and study. It’s not easy to do it on your own. Even with the hundreds of good trading books out there to guide you (check out Market Wizards and Reminiscences of a Stock Operator for starters). You can tilt the odds in your favour if you find somewhere with a well-trodden training pathway to successful trading. You also benefit from the expertise and experiences of successful people around you. Ultimately you make your own trading decisions as a trader. However, having consistently profitable, proven money-makers surrounding you (not theorists or talking heads) will accelerate your learning. Successful people will help you out and mentor you because they know you will become a contributor to their success in time. It also feels great to teach other people skills we know. At the very least – find solid, dependable, unbiased sources of trading info from the twitter stratosphere and add them to your Tweetdeck newsfeed. If you want help with that, just ask us.
If you don’t want to obey Lesson 1 or Lesson 2, and you still want to play with real money, do what the most successful trader of all time tells you to do. Warren Buffet, CEO of Berkshire Hathaway, has made more than a few bucks buying and selling shares in his time. He tells us “buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time.” If the S&P 500 doesn’t float your boat, try the Eurostoxx 50. And if you aren’t sure what an index fund is, get on that research.