The Trader’s Ego
One popular solution to financial freedom is through trading. Virtually every daytrader loses their entire account at some point. The reason for this is because daytrading offers high leverage, and the risk loving daytrader takes on way too much risk. In addition, they never even measure their risk!
In contrast, swing traders hold their positions for several days, and sometimes weeks. Since margin requirements for swing trading are much higher, these traders cannot access as much leverage. To someone who is new to trading, technical indicators and strategies such as selling short can seem to be a daunting challenge. However, with diligent practice, swing trading can be effectively learned.
The single biggest challenge for any trader to overcome, be it daytrader, swing trader, or even mutual fund manager, is to overcome their ego. When a trader thinks that a stock is going to go up, and she buys it. Then, the stock goes down! The successful trader will notice that their prediction was wrong, and quickly close or reverse their position.
In contrast, what most traders do is allow their ego to take over. They say to themselves, “I know I’m right.” And they watch their investments go down and down and down. They believe they are right, but they have lost all the money.
As a matter of fact, this is exactly what happened with Bill Miller and Value Trust Fund. As you can see from my previous post, he kept thinking that his investments in banks would go up, but as bankruptcy threatened these institutions, the value of his investments plummeted.
So, what’s the solution? As usual, the answer is education. Instead of merely opening a trading account, and doing what all the other traitors do, the best thing to do is to learn successful strategies from successful traders.
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
