Lessons

Lesson 2: Psychology of wealth generation

When I was younger (I feel old now after saying that), I used to really enjoy watching a comedy called only fools and horses. One of the lead characters, Del, used to have a phrase “he who dares wins”. And he is correct. The truth of the matter is that the markets reward risk takers. You cannot enter the market expecting to sit on the fence and make money doing nothing. You know this. To put this into perspective, money sitting in your Etoro account that is idle or that is locked in ever extending SL’s is worthless to you. It would be better off sitting in the bank where at least it would earn a minuscule amount of interest.

If you want to make money effectively, the first thing that you have to understand is how to use money. If we consider the generation of wealth as a process, it would look something like the following:

input———————> (process)———————-> (output)

capital ——————-> investment——————> return

So obviously you can see here that there are two factors that will determine how much of a return you make. The first is the level of input or level of capital. Assuming an equally profitable investment, the more input capital that goes in the larger the output or return. This is very apparent. The second factor is the process of the investment and how effective (or ineffective) it is. A good trade will achieve a higher return than a bad trade. I’m sure this is self-explanatory.

Now let us discuss the relation of these two factors. Assume that all of your balance is locked in a trade in which the process has not gone as desired and your capital is sitting there idle doing nothing. You are not gaining anything. In fact you were losing because not only are you paying maintenance fees to keep the trade open, but capital that could then be used in another investment to generate a return is sitting there idle. In effect it becomes useless money because it serves you no benefit.

As a trader who seeks to generate wealth, I consider a lost opportunity to generate wealth, a financial loss. Anyone who is rational will tell you this. The exception being some less ethical traders who want to benefit from their copiers and try to hide this truth from them. Many traders (particularly of a certain organised gang) use this trick to trap investors and copiers and ensure that they cannot leave them without taking a massive hit.

Getting back to the point at hand, you should be prepared to take a risk in order to receive higher returns and if you enter into a trade that is not performing well, then do not be afraid to close at a loss if you feel the opportunity to get higher returns from the capital can be achieved with a different investment. Only wait it out if it makes more financial sense to do so.

This is one of the most important lessons that you can learn about trading. Do not miss out on opportunities because you are psychologically scared to close at a loss! Every trader does bad trades. A skilful trader will be right approximately 40% of the time and lucky another one third of the time. This will give them a profitable trade rate if they respect profit-taking and stop losses of approximately 73%. With such a ratio, if they actually have the correct psychology to generate wealth, they can perform very very well. Just look at my winning percentage and see the results for yourself. Don’t let the market bully you into being in an idle position where you can do nothing but sit and extend ourselves until you have wiped yourself out or made yourself unable to trade because all of your capital is tied up in one bad trade.

1 Comment

  1. Some traders I liken to Rodney with his broken lawn mower engines – hang on to a bad trade for far too long, eventually it comes good more by luck than judgement and then make the same mistake again.

    Delboy had another phrase for these people – ‘You Plonker!’

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