Here we go again.
An article in Fortune magazine recently talks about the older members of Generation Z, those 20-somethings who have come of age in the era of financial crisis and global pandemics—and how they are trading much more than their predecessors.
The article attributes their investing behavior to good old-fashioned FOMO (fear of missing out). While younger folks are putting more money into stocks—which is a good thing—they are also trading in and out of the market more often… which is a not-so-good thing.
Because the facts haven’t changed: Your odds of becoming a successful short-term trader are the same as they have always been: about 3% or so of retail traders are successful.
To actually make money, you have to do this instead…
Financial influencers and social media sources are reportedly a major source of trading inspiration and ideas for younger folks seeking quick profits.
It does not help that the trading apps that run right on your phone, as well as a no-commission trading environment, encourage activity. The article quotes sources who work for trading platforms as pointing out that these younger investors have access to fancy tools that were not available to previous generations, so they have an advantage that will reverse the trading dynamics that have been in place since the dawn of time.
That is hogwash: there are no new tools.
There are, instead, new delivery methods. Today, I can get both my memes and my charts right on my phone in seconds. The last group of market dynamic-changing younger folks had to wait for the whistle, bleet, burp, and buzz of a dial-up connection hitting paydirt before they could view all these tools.
Your odds of becoming a successful short-term trader are the same as they have always been: about 3% or so of retail traders are successful.
That is not “make a zillion dollars and live in a castle on the beach” successful. At best, it’s “did not lose all your money and have to live on your cousin’s couch for a few months” successful.
Most retail traders will in fact lose money. That has always been the case, and always will be.
It is not because of some evil conspiracy to prevent them from making money. Wall Street does not really give a flying anything about who does or does not make money as long as they get paid. There is no giant cabal plotting to keep these investors from getting rich.
The biggest reason that retail investors fail is that evolution has programmed them into particular behavior patterns that almost guarantee that, over time, they will lose money.
Fear and greed are the two most important human emotions. To the lizard part of our brain, which acts purely on instinct, every single thing we do is guided by one or the other of those emotions.
Like it or not, humans are herd animals in many respects. Tribalism is not new. We like being in a group that looks, thinks, and acts the same as we do. To succeed at trading, even more so than investing, we must do the things that go against all our instincts. We must step away from the crowd.
Most people have never heard of Everett Klipp, but Klipp was a wildly successful gain trader in the Chicago Board of Trade corn pits. During his career, he was often referred to as the Babe Ruth of the Board of Trade.
Klipp’s advice to you traders was always the same: “You have got to learn to love losing money.”
No matter how strongly Klipps’s opinion was about market direction, he exited immediately if a trade went against him and waited for a new trade setup. He would often take several small losses in a row before the market finally reversed direction and went higher.
You win as a trader by taking several hundred-dollar losses and then having the market go your way and hand you several thousands of dollars in profits.
Most people cannot do it.
The phrase “it will come back” has killed more traders than anything else. You could flip a coin on market direction every day, and as long as you mastered risk control, you would stand a good chance of being more successful than the average retail trader.
Klipp never predicted what he thought the markets might do—he reacted to what they did. He asked his trainees, “Why are guys who know where the market is heading no longer at the Board of Trade? They are either retired or broke. And I can’t think of any that are retired.”
It is how small you lose.
Charles “Charlie D” DiFrancesca was a trader at the CBOT back in the 1980s. He made a fortune during his years in the pits and was a legend to his fellow traders. He is reported to have gone from zero to more than $40 million of net worth before dying of cancer far too young, at 39 years old.
Charlie lectured new traders at the CBOT in 1989, just two years before he passed away. Anyone wanting to be a trader should watch the whole talk (it’s on YouTube), but he gave away the biggest secret in one quote from the lecture.
You’ve gotta have a puke point. When you’re long at 4, don’t look to buy ’em at 2. You want to get out! You want to throw those contracts up all over your shoes. That’s a puke point. The people that do the best in here are people who have a low puke point. When you have a position on that goes against you, you gotta get out.
We will talk more about this over the next few weeks.
If you want to make enough money to live your desired life, I can help you with that. It does not involve day trading or getting rich off whatever hot new trend the media is hyping today.
All too often, media and advisors go with the “Gotta feed the ducks what they are quaking for” strategy. They sell you whatever is most accessible, not necessarily what will work the best.
I will even show you how to make some money trading if you cannot resist the habit. It cannot be done in ten easy minutes of your spare time. It does not involve a 98%-win rate. And it does not require a Ph.D. or other advanced degree.
Buckle up.
This is going to get interesting.
