7 life lessons trading stocks teaches
There is something natural and beautiful about a stock chart. Stock prices reflect the psychology of the masses, which means stock charts are pictorial representations of human behavior. Simple yet complex. Not only does trading stocks give you a better understanding of human behavior in general but also it forces you to take an introspective look at yourself.
Trading stocks is a journey of self-discovery. These are the top 7 life lessons my own journey has unlocked.
7. Think in multiple timeframes.
The best way to analyze a stock is by viewing it in multiple timeframes. Whatever the primary timeframe I'm looking to trade, I always zoom out to a longer timeframe. For instance, if I'm trading a daily chart, I'll first look at the weekly chart. If I'm trading a 5-minute chart, I'll first look at a 30-minute chart.
By seeing the larger picture, we can make better decisions. What looked like a a downtrend on the daily chart may only be a pullback amidst a strong uptrend. The longer timeframe is useful for making strategic decisions. If the longer-term trend is still down, we can't buy and vice versa. It helps us avoid bad decisions.
Most people make decisions based on short-term consequences. Whatever feels good in the moment. We have become a culture of instant gratification. Often the short-term consequences have opposite desirabilities from the long-term... similar to the stock trending in different directions depending on the timeframe.
For things like food and exercise, the short-term consequences are the temptations that will prevent us from achieving our goals. Fulfilling the cravings. Doing what's easy. Avoiding pain. By connecting our decisions instead with their long-term consequences, we equip ourselves to overcome barriers that stand in the way of what we really want.
6. Know when to say "Enough."
It's human instinct to always want more. Markets are driven by greed... along with fear. When we hold out for more, we typically end up with less. As they say, get out when the getting is good.
There is nothing wrong with a profitable trade. Even if you missed out on a big portion of the move. You should know your criteria for success. If your goal is to make 5% on a trade, be happy with 5% even if the stock ended up making a 10% move. By your own definition, it was a complete success. No need to beat yourself up on what you missed out on.
There will always be people making more money and outperforming you. This isn't a competition against others. The true competition is with yourself. By having a clear understanding of what will be enough to make you feel happy and successful, it is attainable. However, if the answer is simply "more," you will never have enough.
5. Think for yourself.
I feel like I grew up always being told what to think. The facts and information I needed to know were presented to me and then I just needed to be able to regurgitate it. I lacked independent thought and my own opinions.
There will always be other people to tell you what to think. TV, radio, social media, friends, family, and co-workers will all tell you what to think. Noise all around us. You have to be able to filter out the noise.
It's very beneficial to seek counsel from others, but it's even more important to do your own individual research and come to your own conclusions. No one will truly be able to say what is best for you. Only you can do that.
One thing that the markets prove over and over again — the masses tend to be wrong. When overall market sentiment is most bullish, markets tend to go down. When sentiment is most bearish, they go up. It can pay to follow the trend, but it also pays to stand apart from the crowd. Think for yourself to determine which course of action is right for you. The people who make the most money in the market are right when everyone else is wrong.
4. Opportunity is abundant. Window of opportunity is scarce.
We have unlimited opportunities at our disposal. They show their faces every single day if you're looking for them. There are more than we would ever be able to jump on. We can talk about jobs, investments, relationships. You can't have a relationship with every person, can't do every job, and can't make every investment.
A lot of these opportunities may not be attractive, so we're talking specifically about attractive opportunities for us. What we're looking for. Even in that sense of the term, there are more investment, job, romantic partners than we could ever take part in. There is an abundance.
But when you focus on any single one of those, the window of opportunity — the time period that we can actually take action — is very small. You might see someone you're interested in and you might have less than 30 seconds to make a move and introduce yourself or that person could be gone from your life forever. Investment windows can slam shut in days, hours, or even minutes depending on the type. Same thing with a job. An attractive job won't be available very long. It won't sit around waiting for you.
Whatever the type of opportunity, if you don't act on them, someone else will. You must be open to opportunities, willing to receive them, and at the same time ready to pull the trigger. Or else they will pass on by.
3. Always have a plan.
You never know what the market is going to do but if you don't know what you're going to do you're dead. Markets move very quickly so we must be prepared to act. As we already discussed, the window of opportunity is very small so when it presents itself we must already know what action we will take.
"Fortune favors the prepared mind."
A plan does not only include what you hope will happen. It must also include how to handle the situation when things go wrong. Because things will go wrong. All the time. Life is unpredictable but it repeats itself. No matter how promising a setup looks it can still fail miserably. An essential part of the plan is risk management — deciding what you're willing to lose before getting into it in the first place.
Having a plan helps you keep your head. It's easy to panic in the markets. It's like trying to ride a bull that is constantly trying to buck you off. Many times no action can be the best action. Stick with the plan. If the plan isn't working, come up with a better plan next time.
2. Progress isn't a straight line.
When you're committed and working towards a goal, it's natural to think you're consistently making progress day in and day out. Always moving one step closer. But in reality upward moves are met with pullbacks. Regressions to the mean.
When I was a junior tennis player, we did the Cooper test as part of our training. The Cooper test is very simple: run as far as you can in 12 minutes. I had beaten my person best 3 times in a row when one day we had a surprise test thrust upon us. I had prepared for the other tests, but now I was caught unprepared and utterly terrified of not beating my last distance.
What did I do? I refused to run that day.
When I showed up at practice the next day, the coaches had moved my name to the bottom of our challenge ladder.
When measuring progress, it's important to focus on the long-term trend. The direction of a trend is determined by looking at its highs and lows. If you are making higher highs and higher lows, the trend is up.
Even if I had ran half a lap less than my record, it still would've been better than the first two times I ran it. But in my mind any step backward was a failure. Being unable to deal with setbacks can set us back even further. By understanding that these consolidations are times to recommit, they can serve as launching pads to reach new heights.
1. Perfection is impossible.
School teaches the notion that the goal is to be perfect. You are rewarded for being right and penalized for being wrong. Perfection can easily be measured: you answer everything perfectly, you get 100%.
In real-world decisions, there is no one correct answer for many questions, but instead a variety of outcomes filled with shades of success and failure. It's very difficult to grade ourselves when there are no best answers and many variables at play.
In stocks and life, perfection is impossible. You can't buy at the very bottom and you can't sell at the very top. If you do manage to pull it off, it's luck. The goal is no longer to be perfect, but to be profitable.
"Perfection is not attainable, but if we chase perfection we can catch excellence."
We're going to be wrong. A lot. In trading, you can actually be wrong more than you're right and be highly successful. We should still constantly strive to improve ourselves and our performance while knowing we're never going to get a 100% stamp.
Any pursuit is always governed by universal life principles. Once you discover a principle in one area, you realize it starts to show its face in other endeavors too. That's because these universal life principles govern all pursuits. Trading stocks is a high-stakes personal journey that has taught me countless life lessons. And I'm still constantly learning. I hope that now these life lessons will show their face more for you.
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