This post is the first in a series of posts I am writing to guide you in getting started trading. You could skip this post and go straight to the next posts if you feel that the answer to the question “Why Trade” is not of value to your trading. But for me personally answering this question changed me from being a break even trader to a trader with an edge in the markets.
Trading consistently profitably is hard and it takes a lot of practice. Therefore let’s talk first about a fundamental question most people skip before they take up the challenge of trading or any other challenge for that matter.
Many books, sites, presentations that discuss trading will talk about what to trade and how to trade. They will tell you for example: trade options and this is how you get in a trade and this is how you exit. This is all fine and well. And I will certainly get into this later. However, I like to argue that it is equally important to first know why you are doing what you are doing and how you are doing it.
Why are you reading this blog and spending all that time to learn how to trade (better)? What thrives you to do all the hard work that is necessary to succeed? Or if you think it is easy to become a trader, why do you want it to be easy? Do you think this will give you any fulfillment, make you rich, or make all your dreams come true?
There is no right or wrong answer here. I just want to get you thinking consciously about it before we move on and get absorbed in the what, when, where and how of trading. If you are new to trading, you will soon find out that there are many factors to consider when trading. I will try and guide you as good as possible.
Just remember, that the one factor that always influences your trading decisions is:
Therefore what thrives you, thrives your trading in one way or the other.
If you know why you are trading, it will be easier to keep going even when things start to become less pleasant. For instance when you experience an extended period of draw down / consecutive losing trades. As an example I will tell you my reasons for wanting to trade, but now I will first go into the one reason, that is not a real, or definite reason why you would wanna be a trader.
Not a fundamental reason to become a trader
Making more money is never the real final reason why you would want to trade. There will always be a deeper reasoning behind it, if you know it or not. The trick is to dig a little deeper and get an insight in what gets you going and truly motivates you. If money was your first thought, then you are only half way at getting a chance of becoming successful as a trader.
Just think about it. Firstly, there are so many other things you can do to make a lot of money. So why choose trading? And secondly, why do you want (more) money? What is is that you think it will bring you? Everyone has valid reasons, but only successful people are conscious about their reasons.
I will describe my reasoning on a fundamental and practical level. Let’s look at the fundamental first.
The fundamental reason why I am trading, is that I want:
More specifically financial freedom, which in turn will bring me:
- the freedom to live where ever I want.
- the ability to give my family whatever they want or need.
- the ability to build wealth.
- an end to money worries.
If I make a list of the reasons why I choose trading instead of some other endeavor, then the list looks like this:
- Trading is an interesting mental challenge.
- It is a way to learn more about myself.
If I translate the above reasons to practical and very personal reasons than the picture becomes like this:
- My wife is Turkish and I am Dutch. We have lived in Turkey and now we live in The Netherlands. If we would decide to move back to Turkey one day, this would be problematic as I would first have to find a job over there. If I would make enough money trading, than this would be less of an issue, as I can trade from Istanbul the same as I can from Amsterdam.
- We would like to be able to visit friends and family in Istanbul more frequently, but flying over there is costly. If I could make substantial residual income trading next to my day job I could afford some extra flights.
- I am pretty pessimistic about the retirement plans that comes with the system here in the Netherlands and the job I have. I am convinced I need to build up some sort of nest egg for my retirement, but this is not possible from my current income, so I need residual income to be able to invest.
- My job income is barely keeping up with my growing expenses. Me and my family are not big spenders. We don’t have a boat, or a fancy big car, but as my kids are growing older all kinds of expenses start adding up. Promotion usually means more stress and more time away from my family for only a little bit more pay. With trading however the income potential is only limited to my skill as a trader.
- About two years ago my wife and I decided we needed to move. We ended up moving into a house that made us really unhappy, so we moved again. And this wasn’t about not liking the kitchen or the bathroom, but about more serious issues like not feeling safe and at peace in your own home. I will spare you the details. We managed arranging the finances, but ended up with and even higher mortgage than we had before. A mortgage, that I can never fully pay off by working a day job. This episode in my live made me realize how limited my financial abilities are in order to provide basic security to my self and my family. Trading will allow me to build up additional financial resources that I can use to better provide this security in the future. Now, that is a real motivator, I can tell you that.
- I am trained as an engineer and taught myself to program. So I am trained in statistical thinking and problem solving. It is something I am good at. And trading offers me the perfect matching challenge.
- I am a life time Aikido practitioner. As probably any martial arts practitioner will tell you: the biggest enemy is you. So you first have to focus on developing your self, before you can focus on solving / eliminating the problem out side of your self. It is exactly this kind of self awareness that is triggered while trading. So I see trading as a mental exercise similar to that of practicing Aikido.
Ask again and discuss
As you develop as a trader, your reasons for being a trader might change as you progress and reach more of your goals. So, I believe it is good practice to ask your self the ‘Why Trading’ question every once in a while and re-adjust your goals to keep them and your trading efforts in line with what thrives and motivates you to trade.
Also, I believe it is important to discuss this question with your loved ones, better half, spouse, etc. I mean, I put a lot of time and effort into my trading, time I obviously cannot spend on my wife and kids. So, in order to have their support, I tell them (mostly my wife) why I am doing all this and ask if they agree. This way I can go about my business without feeling the need to rush things, because I am expected some where else.
Transforming your Why to SMART Goals
I already briefly touched on goals. Goals express what you want to achieve. As such they are important to guide you in your trading, but they don’t mean anything if they are not grounded in the Why of doing it all. So figure out your Why if you haven’t already. Once you have done that you can define S.M.A.R.T. goals based upon that.
Smart Goals are:
I cannot tell you what goals to set, but an example goal for your trading can be:
Be consistently profitable for one whole year of trading a small live account.
This goal can be made SMART like this:
Have a 20% growth in equity with maximum 10% draw down trading from 1-1-2015 to 31-12-2015 trading an account with a starting balance of 1000 USD.
Goal of 2015 measured by my equity curve
This has actually been one of my main goals in trading for 2015. I measure it by following my balance on my trading account. I am already experiencing a draw down larger then 10%. It is currently around 15%, while my account is still up by about 12% on year to date. I cannot undo the draw down, but I still continue and try to achieve a 20% growth for this year. By the end of the year I will reevaluate my trading and decide if I will commit more of my capital to it, or that I will have to become more consistent still before committing any more money.
So I have told you what the first question is you should ask your self before you start trading. And I have showed you how I have answered this question for my self and how I have set goals that are in line with what thrives me to trade. I sure hope this has been helpful. In the next post I will begin to explore How you can Trade.
Next in this getting started series
How to Trade – an overview of ways to trade
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