The Stock Market - Expensive Training Ground
Due to changes in the economy and the inability of money managers to beat the market, many individuals have considered learning how to trade the stock market. For the disciplined and educated trader, the market can be the means to additional income. But for those that are new to trading or lack trading experience, the market can be an unforgiving and expensive teacher.
For the uneducated trader, stock market risks outweigh the benefits. Although it is possible for new traders to make significant gains, there is probably a greater chance of losses. Most experienced traders who have learned trading through trial and error have likely spent a great deal of money perfecting their skills. Trial and error in the market, teaches traders risk management and what not to do while trading.
New traders experience stock market losses because they do not know how to react to changes in market trends. They take undue market risks without realizing it. Because the market reacts quickly to news and changing trends, the new trader is often unaware of the information necessary to make an informed trading decision. Although making significant profits is a common event, it also provides the new trader with a false sense of confidence and security. It is through experience that most traders realize that risk management is the key to making consistently profitable trades.
Risk management is the process of increasing the probability of success, while minimizing the probability of loss. The method for minimizing losses changes for each type of trading strategy being applied. For this reason most traders use selected trading strategies that fit their risk-return preferences. Since return is a function of risk, most experienced trades are aware of the potential amount of capital they are risking in order to achieve a specific amount of return. This is a very difficult thing for the new trader to determine. Not being able to determine the risk involved in a trade often results in higher stock market losses than the trader can afford.
The market is an expensive teacher because it gives you the answer before you can determine the question. Hindsight is 20-20, and many new traders have to analyze their mistakes in order to avoid them in the future. For many traders it potentially takes making a mistake multiple times and incurring significant trading losses before they can ever determine the correct question to ask or identify the mistake they are making.
Learning to trade the market does not require losing vast sums of capital. In fact, successful traders often reach out to experienced coaches and instructors and stock education companies before they make their first trade. Taking advantage of classes taught by experienced instructors can speed the learning curve. By learning the specialized techniques taught by experienced intructors, one can learn in the same way that the apprentice learns from the master. By spending the time listening to an experienced instructor, a new trader can learn how it may be possible to avoid the most common stock market risks, and increase their probability of making profitable trades.
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