Top Misconceptions About Trading

I interact a lot with traders from all walks of life. I receive hundreds of emails every month from traders and upcoming traders from around the world. Over the years, I have noted a few misconceptions that people have about trading. In this article, I will highlight some of these misconceptions.

There are experts

Many people refer to me as an expert trader. The fact is that there are a very few expert traders in the world. James Simmons of Renaissance Technologies and John Overdeck of Two Sigma are the two money makers I count as expert traders. They have a long history of having double digit returns even in times of global recession. Apart from the two, I have not found any other person worth to be called an expert. Therefore, I recommend that you avoid any person who claims to be an expert trader.

Quick Cash

Another misconception is that trading is a way of making quick cash. The truth is that successful traders don’t follow this rule. They understand that it is possible to double or triple their money. However, they don’t take this route because, they understand that if it is possible to double the money, it is equally possible to lose it all. If you start trading to get quick cash, chances are that you will lose it all. The only strategy that will make you money is one that requires you to risk little money. You will not get much but you have chances of being consistent.

You need a lot of money

This is a common thing that most traders I talk to complain about. They say that you need a lot of money to become a successful trader. To me, this is wrong. Today, the field of trading is very competitive which has made brokers reduce the amount of money that one needs to start with. You can even start trading with less than $500. My advice to any trader who feels he can’t trade well because of his financial status is to start learning. As you perfect your art of being a trader, money will start coming to you. On a large scale, a person like David Einhorn started his hedge fund with less than $1 million. Today, it is worth more than $10 billion, all because he has performed well against the market.

You need a background in finance

Another misconception about trading is that you need a background in business and finance to succeed. This is one thing that locks so many people from being traders. The fact is that having this background is not necessary at all. In fact, when hiring traders for my trading floor, I never consider their academic background. When you start your career as a trader, you forget your academic qualifications and indulge in trading. This is because much of what you learn from the business school does not apply in the real world.

Buy Undervalued Stocks

On paper, this is the right thing to do. You should always buy companies that are undervalued. However, in trading, this does not work. Remember that as a trader, you are not interested in the underlying fundamentals of the company. Instead, you are only interested in the short-term moves. As a trader, the reason to buy a stock should be based on the technical and fundamental analysis. You should ignore all the talk about price-to-earnings and other valuation methods.