When traders start out learning how to trade online, he has a sense that it must be hard to make money. He knows he is competing against the smartest people in the world. However, he hopes that there is a shortcut, some easy, perfect trade setup that might be too small for Goldman Sachs or a hedge fund to bother trading, and he could use it to make a living.
What is the best, perfect trade setup?
I occasionally get an email from a disheartened trader asking me what my best setup is. When I respond that there is no best setup, I sometimes get an angry response accusing me of selfishly keeping the best setups for myself. He believes I am fearful that I might kill the goose that is laying golden eggs for me.
Nothing can be further from the truth, as anyone who is familiar with my trading will tell you. I do not hide anything because what separates profitable traders from those who are not yet profitable is not a collection of secret, perfect setups. Instead, it is simply that profitable traders have enough experience so that they can trade correctly. They use the same setups that everyone sees all day long.
The experts are simply better at deciding which side of the trade to take and how to manage their trades. What frustrated traders do not yet understand is that perfect trades cannot exist because an institution has to take the other side.
There is an institution on both sides of every trade
Remember, markets are created by institutions that need to be able to buy and sell things. No trade can take place unless there is a way for the buying institution and the selling institution both to make money. They often scale into trades or hedge in other markets to increase their probability.
No trade can ever take place unless there is an institution willing to take the other side. We individual traders are just too small to be of any significance. We can never get filled on any trade unless there is one or more institutions entering at exactly the same price and trading in our direction. And, other institutions taking the opposite side, trading in the opposite direction.
Trade-off between probability and risk/reward
If you want to take a trade that has a high probability of a big profit with very little risk, then guess what? No institution will take the opposite side and accept a trade with a high probability of a big loss and while going after a small profit.
Let’s get real. It is a market and there are smart people on both sides. The current price is what both sides feel is fair. It doesn’t matter if you see some convincing guy on television saying it is cheap. There is an equally smart guy whom you do not see who believes the opposite.
Because of this, the edge that even the best traders have is always going to be small and trading profitably is always going to be difficult. It is unfortunate that so many sites make it sound so easy. They say all you have to do is spend a week or two memorizing some candlestick patterns and you will be rich!
You are entitled to nothing
In your heart, you know that this cannot be true, but you hope that it is. You feel entitled to at least a small part of the pie. You want a sign that you are lovable and not insignificant, and that the big boys and girls are going to include you in their game.
Is it too much to ask for just a little profit, especially if you are willing to work hard and follow some trading rules that a trading expert said would earn you $1,000 a day? Won’t Wall Street have some sympathy for a beginner and share some crumbs?
They might be crumbs to Goldman Sachs, but they are big enough to give you a nice lifestyle. You are being reasonable and are willing to promise to not take too much. You are a good person and are appropriately deferential. Doesn’t Wall Street care, and aren’t the firms willing to go easy on you so that you can make a living, even a meager one?
The markets are fair
Well, guess what? You are entitled to nothing, and that is just the way you want it to be. To be able to fully trust the market, you need the game to be completely fair with no one receiving special favors. You want the market to be 100% efficient and honest so that you can rely on it to give you consistent profits once you become a good trader.
And you don’t want to worry constantly that your earning potential might some day be taken from you by a group of powerful insiders who somehow rig the market to help their friends at everyone else’s expense. That is why it is good to be entitled to nothing. It is true for all of us and that’s what keeps the market reliable.
Eat what you kill
The “eat what you kill” foundation of the market is part of the appeal of online trading, especially day trading. Humans are naturally competitive, and winning in a difficult game is extremely satisfying. It makes you happy. Beating a 6 year old at golf is not any fun, but beating Tiger Woods feels great!
Every dollar that you make comes from someone else, and you have no right to his money unless you trade better than he does. You have to earn it through excellent work. Working hard to learn some patterns is not enough to convince a smart institutional trader that you deserve some of his money.
As humans, we are hopeful and trusting. However, I think that it is an abuse of trust to make trading sound easy. Trading profitably is very difficult and takes lots of hard work, and persistently good trading. You don’t have to be great, but you do have to be consistently good, which is much more difficult than it sounds.
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