WHY IS TRADING SO DIFFICULT?

Why is Trading so difficult? Why is finding the proper source for a trading education so difficult? Well, for starters, there is a huge disincentive for those who know how to trade, to teach others the same. What you learn, for the most part comes from what can be garnered from books, and your own experience,...screen time if you will.

What about seminars, newsletters, programs that profess to teach trading?
CAVEAT EMPTOR!

I'm not saying that everyone who professes to be able to teach trading is a crook. I'm saying most are.
(I must insert here that I have met some fantastic people through trading. Foremost in my mind is T C Liberman with Windotrader and his wife Marilyn who would give anything to help a novice learn.)

Just think about the dynamics of learning to trade, and who would teach. You study markets for years and years, losing money, spending countless hours in front of the computer, constantly being beaten by those on the other side of the trade and being pushed to brink of mental breakdown. You finally recognize something in the markets that seems to work for you. You make money. You prove to be consistent and realize that you understand how to trade so now you decide.......
to teach your competitors? That's not usually how it works.

More likely you try to trade, either are successful for a while or not at all, then you learn about making money by professing to teach. That is one of the primary reasons learning trading is difficult. Beware.

(I guess you might wonder if this website fits in a similar mold.
This website was created by me as first a guide for those attempting to learn to trade: a map of the landmines if you will. I was hoping to help others avoid the mistakes I have made. My second idea in creating this site is my attempt to clearly log my thoughts on market behavior, and specific trades, ....so I might later review them with a very clear eye as to their validity.)

But there are other reasons that trading is so very difficult, besides simply the difficulty in finding a tutor.
Consider this:

A trader friend once sent me the following:
new trader to Master trader: "Sir, what is the secret to your success"
master trader "two words"
nt "what are those two words"
mt "right decisions"
nt "how do you make right decisions?"
mt "one word"
nt "what is that word?"
mt "experience"
nt "how do you get experience?"
mt "two words"
nt "what are the two words?"
mt "wrong decisions"

Being a successful trader is the most difficult thing that I have ever attempted. I am still learning, and believe me I do put in my time.

Trading can be enormously expensive. Books, programs, seminars, training gurus and of course capital losses all take their toll. Brokerage houses recognize the high failure rate in trading and for the most part couldn't care less. They know that as soon as one trader blows up (the common parlance for a trader losing all his capital) there will be another lamb at the gate. Make no mistake. Trading is tough.

Most people consider trading to be like gambling. Maybe you have a 50/50 chance of win vs. loss. But that analogy is so very wrong. Trading odds for a novice are much worse than 50:50. Trading is so much more difficult than that. Gambling has rules. You play, you put down your money. Are you going to play on the $5 or $500 blackjack table. Will you wager $10 on the football game or $10,000. Either way you know ahead of time what game you are playing and the bet, and timeframe of the game, is set. Trading is nothing like that. You can start trading by making a trade without having the slightest idea of what you can lose. You might wager on a specific trade and be right, but not take your money out of the market because there is no defined beginning or end, and then finally have your money taken out for you, because you lose more than ever imagined possible. You might think you are playing with a $500 investment and initially be right, but no one will stop you from adding or subtracting from that wager. You might start the trade with the intention of it ending today, but then decide mid course that this would be a better "long term" trade. There are no rules in trading unless you make the rules.

What about PAPER TRADING?.....Can you learn to trade by Paper Trading?

The debate is this, should a novice trader spend time paper trading an imaginary account in the hopes that this may mitigate some of the losses he will invariably suffer as he tries to learn to trade.

THE PRO opinion: developing traders will lose. They will make mistakes. They are like lambs being brought to slaughter and a paper account will allow them to learn to trade, without losing capital.

THE CON opinion: trading has much to do with learning about and understanding markets. But it is so much more than that and involves not only having an idea of future market action, but also being able to correctly institute and manage a trade based on that notion. This means understanding what trading options are available and choosing the correct one, quantifying your odds for success and allocating resources appropriately (using exactly the correct amount of capital) instituting the trade at the precisely the correct moment, then once the trade is placed, recognizing when negative market action may simply be volatility vs. when the trade is clearly a failure, and exiting the trade in the proper manner (scaling?) and at the correct time so that you profit maximally from your great wisdom.

My thoughts: Paper Trading is worthwhile!
I cannot stress enough how dangerous and difficult trading can be. Quite simply, it is nothing like what the average novice thinks it is, when he first begins. The learning curve is a slow, steady climb that never ends! Great traders today, who make millions of dollars, know this and continue to analyze themselves and their actions regularly in order to improve. Disaster is always one poor trade away for the uninitiated. With this in mind, I think it is of utmost importance to paper trader at first. Yes, the detractors are correct, the mental stress and pressures associated with paper trader are nothing like real trading, and cannot possibly mimic that. But despite this there is value in this effort. My backround is in medicine. Many of the books that are listed in the book review section under books about how we think, first came to my attention as I studied physicians. I noticed how some knew how to respond to emergencies well, and calmly....but many did not. I read about Stanford University and the development of "simulators" that would mimic operating room and emergency conditions and how physicians were being trained in that fashion. Just like paper trading, the stress is not the same, the outcomes very different for similar poor choices. Yet these simulators work. They help young physicians learn how to handle emergencies, and handle them well. They are still in use today, twenty years later. There is much to learn from paper trading, not the least of which is whether or not your "system" works, and whether or not you are comfortable with the platform and broker you chose.

Do yourself a favor and paper trade for a while before you initiate live trading.

But remember that paper trading cannot teach you the same things that actual trading with your own equity can teach.
It is simply not the same.
Try as you might, the novice trader can never mislead his brain into thinking that this paper trade is "for real" and must be treated that way. There is nothing like the perspiration that goes with a trade of size, once the blue numbers on the screen turn red.

Paper trading simply cannot replicate the stress that goes along with those situations, nor can it prepare you for when that comes. So do not paper trader and find success and think that now you will be invincible in the markets. That is not the case. Paper trading is first grade. It is helpful, and a good foundation, but there is much more learning yet to come, when you have completed this exercise. (Mark Douglas rightly teaches that trading should not be this way. No doubt he is correct. Also no doubt, most people do trade with fear and trepidation over uncertainty).

A short story for those who will listen

Finally, let me give you an idea of how difficult trading can be.

A friend and I were one day discussing my efforts at trading. It seemed that I quite often would make a reasonably good prediction about oil, or bonds or the Dow. With this happening with some frequency he wondered aloud why I could not make money with these prognostications. That's when we had a discussion about how trading is so much more than correct anticipation of an upcoming market movement.

Think if you will, I said, that one day, March 18 if you will, a genie comes to you and tells you that because of good fortune you have been chosen, and the genie intends to reveal to you a correct prognostication on the market.
"THE DOW......says the genie WILL BE DOWN 2000 POINTS ON MARCH 18 OF NEXT YEAR"

There you have it. You have a glimpse of the future. The genie has never been wrong and promises this to be correct as well. SO...with that in mind, what do you do?

How simple, right?
You decide that with this knowledge you will take all your money out of the market immediately, thus preventing the terrible losses that would otherwise come.
You feel comfortable with your decision.

Ah, but such is not human nature. It is in our being, it is woven into our souls to want something else......more! How can I not only avoid losing money, but also make money? How can I not only make money, but make a lot of money? How can I not only make a lot of money, but make the MOST money?

You consider this, it does cross your mind, but in the end you recognize that you are a novice so you decide to simply take your money out of the market.

Over the next month or two you watch, incredulously as the market goes .....UP!
Yes UP!

100 points/250/400,500 points and more. Up and up, higher it goes while you watch carefully and remorsefully, knowing that you would have been much better off if only you had waited to withdraw your money. The genie has promised. The market will end lower. You know this, yet you also know you would have been so much better off had you waited to withdraw your hard earned money. Unsure what to do you confide in a friend about the genie. He quickly gives some advice.

"YOU SHOULD SELL THE MARKET SHORT!" says the friend with astounding conviction. (review short selling and short covering).

Not knowing much about short selling you ask a few questions, but mostly listen. You think that YES, this could be the thing to do. But selling short is not something you are comfortable with. Yet who can you get to help you based on this information? You and your friend decide to read about short selling. You do, and you then institute your plan. You will sell the Dow short.

Recognizing that you have lost some of the profit you otherwise would have garnered had you left the money alone initially, you decide to leverage slightly. So you sell assets worth about 20% more than your total equity. (take a minute to review leverage).

This will surely not only make back what you have lost since the genie prediction, but will reap other huge benefits when the market falls.
Once the trade is in both you and your friend smile at each other and think about how smart this tactic is, and begin to mentally count your profits.

Strangely enough, corporate profits are being announced this week by all the major corporations and they are much better than anticipated. The Market responds........UP.....and UP MORE.

You do not like this last bit of unexpected news, nor the continued rise in the market. You find yourself questioning the genie. But he has never been wrong.
Unfortunately your account is now only worth 75% of its original value. This is opposed to the 20% gain you would have had, should you have left the money alone, invested, in the beginning. You are dismayed to find out that leverage can be painful.

Genie or not, the discrepancy begins to eat away at you and you once again speak with your friend about finding a way to not only make money, but to make as much as you would have, had you waited until this point to get out of the market and sell short.
How about futures? asks the friend.

We could buy put futures and leverage that way.....at least with half of the money. In fact, we could buy a single stock put future and increase our leverage if we pick a stock that will fall more than the market as a whole!

You are surprised that your friend knows so much but he is confident, and seems knowledgeable, and even has the stock picked out.

First Solar Inc.! he states rather emphatically.
First Solar? What is First Solar?
C'mon, man. Where have you been?
FSLR is promised to be revolutionary in the energy realm.
This is the corporate entity that has plans to harness solar power to degrees not yet realized anywhere in the world.

"But.... the friend continues...yesterday, they were one of the "stocks on the move" at IBD. They were going down.Hard! The company is leveraged too highly and looking for capital to sustain some of its enterprises.
In addition, I have read that FSLR stands to lose huge sums of grants from the U.S. government because of the recession.
And word on the street is that the CEO is sick. I mean real sick man.

"This is a no brainer."

So be it. You choose to use half your remaining capital to sell FSLR short. You will use single stock futures to accomplish this goal. You have never done this, but it seems so easy. You look for the quote and there it is.......125! Wow, that is a high price. It has to come down. This idea is great.

You have enough capital to sell 500 shares, but in your haste to complete the transaction you inadvertently hit the buy button and BAM! You now own 500 single stock futures shares of First Solar.
You miss the problem.
Ah, but your friend recognizes the mistake.

Crap! Look what you did!!!

Knowing from his extensive reading that you should immediately liquidate a mistake like this, he does just that and hits the sell button. TRADE COMPLETE.

Unfortunately your friend did not realize, nor did you, that this was an incredibly thinly traded Single stock future and the bid ask spread was 20.
You bought at 125 , held for 2 minutes, and sold at 105.
At 500 shares the calculation amounts to a 10 k loss.

Holy crap! How am I going to get that money back????

Now you are not only dismayed, but truly angry. The market has taken your money. Someone has profited from a mistake you made, a simple mistake. You want that money back. That is simply not fair.

What am I supposed to do now? I have to get that money back.

You decide to go through with the short futures transaction, only now you leverage more than you originally intended because of your previous losses. FSLR goes..................UP. Yes UP!

Turns out that the congressman from the congressional district in which FSLR is located, used to be childhood friends with both John Boehner and Barack Obama. He is able to get through legislation that continues to provide government support for this important company. The announcement pushes the stock up and up.

You begin to get emails explaining the importance of liquidating some of your holdings. Something called a margin call as your brokerage referred to it. You are learning much more about leverage than you knew only a week ago.

OPTIONS! your friend exclaims.
Options. That's it. We will buy options and that will give us much more leverage. When the market falls we will get it all back in a hurry......and more!

Options? More Leverage? You are confused, but it only takes a few minutes of explanation and you begin to see how you could in fact, make incredible sums of money this way.

You think about questioning your friend on his plan, but this does in fact sound like the right way to get back those losses. Yes, YES, options it will be. It takes some consideration, but you decide to buy put options on the DOW, and you look for an expiration close to the March date. Unfortunately, options expiration in March comes on the 17th. You recognize that this is one day shy of the one year date the Genie promised about. Once again though, when you look at pricing, you recognize how much you will lose by pushing the expiration out to April. That cost is too high. In addition the market has been quite volatile lately with the rise and the price of options is high. But you know little about implied volatitility and care less. You simply want your money back.

You are pissed about your previous mistakes, and you wish there was a March 18 expiration, but lets face it, by the 17th you'll have garnered much of the gain anyway. As you are thinking about all this you decide to go ahead with the options trade and get it over with. But you have simply lost TOO much money so far. You must get it back. You simply must. So you invest ALL your remaining money in the March put option and choose an "out of the money" strike price below the original level on the genie day. This will grant you far more in return when the market falls as you know it must..

January comes with the market still rising. The rise is slow, but volatility has decreased enormously and the price of options, in response, has dropped significantly. You do not understand how the price of the options could drop so much on such a very minor rise in the market. Your account "mark to market" shows significant losses.

Finally in February the Dow turns and begins to fall, Losing 100, 150, even 300 pts., but despite this it barely returns to its original level at expiration on March 17th.
The options are worthless. Your money is gone.

You are sick. How could this be? you wonder.

The next morning you awake to the news of the East Coast earthquake.