Trading, either as an individual or through a trading floor is one of the most lucrative sectors today. However, most traders fail.
It has been like this since time in memorial. In the 1929 financial crisis, it was reported that thousands of Americans lost millions of dollars. The same was true in the next crisis in 1987 and 2008.
In the past few years, however, the financial market has changed dramatically. New assets like cryptocurrencies, leveraged tokens, and fan token offerings have come. Algorithmic trading has become more widespread around the world.
In this article, We will look at the best known key unchanging facts about trading that you need to be aware of.
Contents
1. There is no expert
Let’s start with something that may seem controversial. This is a fact that many people tend to disapprove. However, the truth is that there is no person who can claim to be an expert day trader. Of course, there are people who are knowledgeable about trading but there is no one who can claim to be an expert.
This includes the best paid analysts at the leading banks, hedge funds, and family offices. Understanding this is a very important thing for any wannabe trader.
This is because mistakes always happen in the trading world. There is no trader with a 100% performance rate. In the past years, we have seen top hedge funds like Greenlight Capital lose money. This is a firm that can afford to hire anybody.
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2. Past performances are important but not binding
The second fact is on the nature of the financial markets. These markets move up and down all the time. Therefore, having an excellent track record is not an indication that you will always perform better.
In fact, this warning is provided by all financial advisors in the world. They do this because a single mistake can end up costing a fund all the money.
In the past few years, we have seen some of the best-known hedge funds underperform the market. Many others have closed.
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For example, in 2022, Tiger Global, a hedge fund that has a long history of outperformance lost more than $25 billion. In 2017, Andrew Hall, one of the best oil traders decided to close his fund after years of underperformance.
The same applies to market performance. For example, while stocks and cryptocurrency prices soared during the pandemic, they erased most of their gains in 2022.
Therefore, while some types of analysis will give you good results at times, the reality is that they will not give you your desired results.
3. Nothing beats good researches
Research is a very important thing for any trader. Today, the trading platforms are very simple such that you can open and close transactions with just a single touch. This means that the process of opening and closing a trade is very simple.
Therefore many traders have a tendency of opening and closing a trade without doing any research, or they settle for a first impression. When this happens, many traders lose money.
Therefore, it is very important for you to always conduct in-depth research before opening and closing trades.
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4. Diversification is key
This is a relatively complicated fact that has elicited many concerns among people. Many people don’t know whether to diversify or not. The fact is that diversifying is a very important thing for you.
You can diversify by having holdings in different instruments. You can also diversify by using different strategies to make money.
For example, you can diversify by having two separate accounts; one for trading and the other for investing. The latter should be made of companies you hold for the long-term investments.
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5. Taking notes matter
An undisputed fact is on the need for taking notes and journaling your trades. This means that you should put down your reasons for buying or selling a security.
When you exit, you should put down the reason for exiting. By doing this, you will be at a good position of monitoring your trades and identifying the mistakes that you do.
Successful traders and investors like Warren Buffet always write down their reasons for buying or selling their investments.
6. Importance of risk management
Another important factor that does not change is on risk management. Risk management is the process of reducing risks while maximizing returns.
There are some popular risk strategies that will never change. They include having a stop-loss, reducing the volume, having a risk-reward ratio, and always ensuring that your trades are closed before the market closes.
Summary
These six points will never change. Some of the other important facts that will never change is that markets are always moving in cycles and the importance of psychology in trading.
External useful resources
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