5 Lessons You need to know to Trade Successfully
Revealing my secret mindset hacks that helped to triple my money within a year!
I’ve been debating whether to write and post about my trading journey because I don’t know where to start. How to make it easier for you to understand money, investing, trading, and financial education.
The world we live in is complex. Our financial system is such a complex web that I still don’t know or have a good grasp of it.
I didn’t believe that I am the right person to learn from. Far from it, I made many stupid mistakes during my trading journey.
That’s what I thought about myself until more people around me came to enquire about my trading and investment journey.
So in this article, I’d like to share more about having the right mindset when it comes to trading.
TLDR;
- Trading is NOT investing
- There is NO such thing as a gut feeling
- Know your risk tolerance
- Risk comes from not knowing what you’re doing
- Don’t be greedy
I realised many women don’t really know much about investing and finances. Some of my friends hate numbers, some just left it to their husbands, and financial advisors and some just don’t have time to research and study in detail.
It’s way more enjoyable to watch a Netflix series than to go through various diagrams, tables and readings.
But ever since I found out that not all insurance agents and policies are for your good (my thoughts here), it’s better to educate yourself and know exactly what you are buying into.
We need to know what is going around the world, and being equipped with financial knowledge is crucial. You can work hard for all you want, but if you don’t know how to preserve it, how to make it work hard for you; you won’t be able to enjoy the fruits of your labour.
Okay, I digress… The point of this article is to share my 1-year trading journey. Ideally, you should be equipped with knowledge of the financial pyramid before you start trading.
The Financial Pyramid is a guide to managing our personal finances. The basic rule of the pyramid is to start from the bottom and move up, rather than attempting to address all aspects of it at once. The four levels of the pyramid are (starting from the bottom): protection, savings and investments (wealth building and speculation).
When I began my journey 8 years ago, I didn’t know which resource I could turn to and where to start. Not many of my friends are knowledgeable about the financial markets, so I had paid many ‘school fees’ during my learning journey. Therefore I hope you can avoid those mistakes I’ve made.
Last year, I decided to impart my knowledge and guide my sister to invest her money in the markets. She was hesitant at first.
But after much convincing and showing her that investing in the markets can be safe, she finally started investing!
It’s never too late to start.
As I was trying to guide my younger sister to learn more about the markets. I always tell her to keep in mind the risk that she would undertake and have always advocated investing for the long term rather than short term trading.
But every time I told her to get a specific stock, she will buy it and sell it when it goes up. She treated the stock market like the Neopet’s Neopian Stock Market.
And I asked my sister what should I write about; she wanted me to share more about trading..and about gamestonks...
We are all blinded by the quick wins and short cut to riches. I’m worried so I’m going to share the lessons that I’ve learned after trading for a year.
Hopefully, you will take heed of the warnings that I’m about to share on the potential money-losing traps that you might find yourself into if you are a beginner in trading.
5 things I have learned during this process:
1. Trading is not investing
I know there are a lot of people out there that think that trading is also investing. But, in most cases, it’s not.
Trading is buying and selling usually for a short period of time. Investment is buying and holding for an extended period of time. Taking a longer perspective on the investment strategy would be an approach to grow your money into something you will have for the long term.
Trading is to buy and sell. Investing is to build over time. [add on: Trading is timing the market. Investing is time in the market.]?
2. There is NO such thing as a gut feeling
Feelings are too subjective. I feel like it’s going to rain today.
I recently watched a YouTuber who decided to create a video about her investment journey where she has a gut feeling that the stocks she picks will do well. It also mirrors a conversation with my younger sister, who said she ‘feels’ like buying a certain stock.
“There is nothing wrong with a ‘know-nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.” — Warren buffet
You need logic and facts before you invest. Even with trading, there are trends, patterns and ways to increase the probability of a winning trade. You make decisions based on the fact that you have a thesis that it would succeed.
You don’t just get together with someone just because your gut feeling says that he’s the one. You have to spend more time with the person, through dating, conversation to understand the person better before deciding whether you can ‘invest’ the rest of your life with the person.
Investing in the stock markets are the same.
You need to know why you have that gut feeling. Is that a company that aligns with your values? Do you use the company’s product, do you like the management of the company?
Research more in-depth into your gut feeling to reveal the actual reason you want to invest in the company.
Clarify your feelings with facts and thesis of WHY.
Every decision you make in life is for a reason. Learn what those reasons are and profit from your wisdom.
The reason why I say so because if you don’t have a proper reason other than your feelings, you are not going to do well if a certain stock does not do well.
I have made the same mistake by investing in companies because I felt that it would ‘do well’. Theses are all the stocks that I’ve bought because of that gut feeling…
My mistake was that I didn’t dive deeper into understanding the company. Learning how to value a company and assigning a cost (with a margin buffer) that I am comfortable with.
This means when you decide to invest in particular stocks, it’s good to have a basic sense of how to value stocks, whether to company can make money in the future and grow to serve more customers or increase profit in the coming years.
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham
The father of value investing, Benjamin Graham, explained that in the short run, you might be on the wrong side of the vote deciding whether the firm is popular or not. But in the long run, the actual substance of the company would be revealed as the market weighs its value.
3. Know your risk tolerance
You will lose money when you start trading. Period.
So you need to know how much you can lose. Consider how much risk you are willing to take, how prepared you are to lose part or all of your capital, and whether you have the ability to accept your losses.
That’s where the financial pyramid comes handy. You need to have a good foundation before you look into trading, and it should be a small part of your money.
My safety net includes my CPF, a compulsory savings and pension plan for Singaporeans, 6 months of savings, and investments with my financial advisor and StashAway.
Knowing this, I can accept it if my riskier trades does not pay off because I will still be okay because of my safety net.
Knowing how much risk we can take is important because it is stressful to see your accounts blood red.
With trading, it is risky as you will face more volatility in the markets. So there are days that it would be red.
Can you able still sleep through the night if you have lost -$5000 for that day? Or $50,000?
What if it’s a 20% drop in your investment value?
What if the losses compound to consecutive 4 days?
Do you have the ability to stay calm and patient when trades do not go well?
4. Risk comes from not knowing what you’re doing
Don’t take unnecessary risk. Don’t invest based on hype, meme or projected return.
You need to know your “why” before you buy anything. Why are you paying X amount for that stock? Educate yourself, research, research and research!
There are two risky trades that I have done.
1. Cryptocurrency
I started investing in Bitcoin and Ethereum since 2016.
It was risky and a bet for me because regulators could easily shut it down if it’s not the right technology.
Countries at that time have started to run pilot projects and studies on the system. Like in Singapore with Project Ubin. I remembered Jamie Dimon, chief executive of JPMorgan, said that it was a fraud.
Cryptocurrency is a volatile and hence a riskier investment.
After Bitcoin and Ethereum peak in late 2018, it mainly stayed stagnant till the end of 2020. At this stage, the Bitcoin and Ethereum would still be the best crypto to hold. I made a lot of mistakes in 2018 by investing in multiple other altcoins.
2. Gamestop
I confess I jumped in and FOMO-ed into the hype. And I’ve lost money.
Did I regret, maybe a little but I am okay with my losses since I know that it’s likely a loss-making trade. I also tried to mitigate my losses by selling some put options.
But why did I wanted to try? Simply because it was a curious experiment for me to see if infinity short squeeze could really happen.
In other words, know your WHY.
Don’t be lazy. Do your homework before making decisions. Ability to make smart decisions only comes through proper research and studies.
If you choose to be lazy and you don’t want to lose money, the safe way would be through CPF or investing in index funds.
5. Don’t be greedy
Know when to stop and get out.
There were a couple of times where greed consume me that I didn’t manage to get out a certain trade.
When I started option trading in March 2020, I bought Disney put options, and I didn’t know when to sell it. Or rather, I was too greedy to sell it when I had about 75% returns. In the end, I took a 25% loss. After re-evaluating my trades, I have learned my lesson.
That is why now I only sell put options because no one can predict whether a stock and go up or down short term with the voting machine. But I can value stock in the long term and know how much I would pay for it.
Trying to make a quick buck can also make you lose more and faster — what is important is that you can consistently stay in the game.
Finally, I would end this on a note for you to be very cautious when you start trading.
Please ensure that you have build up a proper foundation for your financial pyramid. I would very much prefer you and my sister to only trade with extra money that you can lose.
For trading, I recommend creating something like an itchy fingers account with money that you are comfortable losing. We would still need safer investment tools to build a safety net in case our trades didn’t plan out well.
Disclaimer: I am not a financial professional or advisor. I’m merely sharing my own point of view and journey. Do not follow what I do, and always remember to conduct your own research and make smart decisions. If necessary, seek a licensed financial professional’s advice to make the best financial decision that suits your own needs.
