Often when I tell people that I am a trader, I get one of two responses. “Wow isn’t that risky” or “That sounds nice, but I could never do that”. Because of all the negative news that has surrounded the market in the last century, people have become very pessimistic about one of the oldest professions in human history. Trading is really just buying something of value before everyone else knows about it and then selling it when it becomes common knowledge.
The risk that most people see in trading is the same risk they take everyday going to work and expecting a paycheck. You are trading time for money, and at some point your time becomes more valuable and the highest bidder for your time takes you from your boss before he realizes it. Or the opposite becomes true and your time looses value and your boss trades you for someone else.
I spend most of my time learning the value of things and the patterns that surround it, similar to the way you may notice sweaters go on sale in summer and then increase in value in winter, or how the price of airline tickets increase as vacation season approaches. Now imagine if you could buy airline tickets at the cheapest time of the year and then profit from those tickets right before summer break, how much risk did you really take? And what if I told you that you could always return them back to the airline for a predetermined value? Then virtually all your risk could be calculated ahead of time with a high probability of reward.
Using this airline scenario, if you bought tickets in winter for 100 dollars that had a 60 dollars guaranteed refund policy and sold them in summer for 400 dollars, you would have tripled your investment with only a 40 dollar risk. This would create a healthy risk reward ratio or return on investment(ROI). With a ROI that good, How many tickets would you have to buy and sell a year to make more than you make on your current job? 200 tickets? maybe 300?
Now take this concept and apply it to the stock market and instead of tickets you buy a share of the airline for 50 dollar and sell it 3 months later for 70 dollars with a loss limit of 45 dollars. That’s still the same ROI, but now you can do this 4 times a year. Now how many shares would you need to trade to replace your current job? 1000 shares? maybe 1500? It really then becomes just a numbers game.
What I love the most about trading is that it’s not rocket science, so anybody can learn it. It’s a professional skill that usually costs less than a 4 year degree and anyone with time and patience can do it. Notice I didn’t say with money. If you learn to find value of things ahead of the people who don’t , there will always be someone willing to hire you to help them manage their money until you have enough to manage your own.
Trading is simple but not easy, but then again most things in life follow that same rule.