Things You Had Rarely Ever Been Told When You're Talked Into Trading

Table of Contents

• Introduction
• Lack of Warning About Risks
  • Trading is High Risk
  • Most Beginners Lose Money
  • Psychological Factors Make Trading Hard
• Spread and Fees Eat Into Profits
  • Bid/Ask Spreads Reduce Profits
  • Various Broker Fees Compound Losses
  • Accessible Margin Can Lead to Overtrading
• Tax Implications Are Often Overlooked
  • Trading Profits Are Taxed as Income
  • Need to Track Gains and Losses Yourself
  • Failing to Plan for Taxes Reduces Profitability
• It Takes Significantly More Time Than Expected
  • Hours of Market Tracking Needed Daily
  • Constant Learning Required
  • Less Trading Opportunities Than Expected
• Luck Plays a Bigger Role Than Disclosed
  • Market Volatility Impacts Outcomes
  • World Events Move Prices
  • Successes Highlighted More Than Failures
• Getting Properly Prepared For Trading
  • Ask Lots of Questions Before Starting
  • Learn Risk Management Best Practices
  • Start Small to Test Skills Before Increasing Size
  • Have Realistic Expectations

Introduction

When someone first gets talked into trading stocks or forex, it can sound like an exciting shortcut to easy profits. However, those providing the encouragement often leave out key details about the significant risks and commitments involved. They fail to set proper expectations about the level of difficulty, the tax implications, the amount of time required, the sustainably low odds of success, and the role of sheer luck.

If you've ever been convinced to start day trading only to encounter issues you hadn't prepared for, you're not alone. Many new traders enter the markets overly optimistic, without understanding why most fail to build lasting profits. This article will cover crucial topics rarely explained adequately to beginners, so you can make informed decisions and set yourself up for the best chance of long-term success if pursuing trading.

Lack of Warning About Risks

Those encouraging you to pursue trading often emphasize the unlimited upside. They showcase stories of others making quick fortunes through big wins. What they tend to gloss over or mildly disclaimer are the substantial and diverse risks involved.

Trading is High Risk

Unlike regular investing, trading involves very high risks due to several key factors:

• Leverage - When day trading you can access leverage through margins and derivatives far beyond cash invested. While this can increase rewards from correct bets, it also amplifies potential losses from market moves against your position. Losses can eclipse total capital.
• Volatility - As an intraday trader trying to profit off shorter term price movements, you expose yourself to daily market volatility more than long term investors. Sudden swings lead to rapid gains or losses.
• Complexity - With endless data inputs, unpredictability, and imperfect information, consistently profiting in markets is tremendously complicated even for disciplined and skilled traders.

This mixture of leverage, volatility, and complexity means short term trading returns resemble gambling more than a typical career path or business. The risks inherent to the field must be respected.

Most Beginners Lose Money

The statistics on retail trader profitability reflect those substantial risks. Studies estimate 70-95% of day traders lose money and are ultimately unsuccessful:

• A 2012 SEC study found 77% of active day traders suffered losses.
• Analysis by Ersnt & Young in 2011 saw that 70% of traders lost money, and only 11% demonstrated consistent profitability.
• More recently, FTSE Russell research in 2019 indicated only 13% of retail traders achieve consistency.

The reasons for these high failure rates relate back to the inherent risks and complexity of trading markets. Yet, these sobering statistics on how uncommon maintaining profits is are rarely disclosed upfront to prospective new traders.

Psychological Factors Make Trading Exceptionally Hard

If the leverage, volatility, informational challenges, and long odds weren't enough, trading brings immense psychological pressures that most new entrants substantially underestimate:

• Stress - With capital on the line during periods of strong volatility, heavy stress while trading is unavoidable. Stress impairs decision making abilities.
• Emotions - When trades move for or against you, overlapping emotions like excitement, panic, fear, and overconfidence frequently cloud composed analysis.
• Fatigue - Tracking data and markets for many hours daily leads to mental fatigue including lapses in discipline and vigilance.

These emotive and psychological rigors exacerbate the already significant risks from the leverage, complexity, and unpredictability inherent to trading markets. Most looking to trade think they can overcome the statistics through skill, research or instincts without realizing the mental toll involved.

Managing your own psychology is just as crucial as market analysis when trading, which catches almost all beginners off guard. Things like self-discipline, emotion regulation under financial stress, and mental stamina require intense work to develop. Even experienced traders constantly grapple with the psychological burdens of trading which never disappear.

Spread and Fees Eat Into Profits

Another key area rarely elaborated on adequately with new traders is the impact of spread costs and varied fees on your bottom line profitability. These costs don't seem large individually, but add up through high volume active trading to seriously constrain potential profits.

Bid/Ask Spreads Reduce Profits

One fundamental trading expense is the spread between a stock or asset's quoted bid and ask prices. To enter a trade instantly you must buy at the higher asking price, and to exit a trade you must sell at the lower bid price. That difference seems miniscule, but makes a significant dent over thousands of transactions:

• For popular stocks like Apple or ExxonMobil, typical bid/ask spreads may be $0.01 - $0.03
• For lower volume small cap stocks or options contracts, spreads routinely exceed $0.05 - $0.10
• On every market order trade, ~50% of the bid/ask spread is lost

While each trade subtracts only a few cents at most, active traders make many trades daily. Over months this directly reduces profits by hundreds if not thousands of dollars.

Various Broker Fees Compound Losses

In addition to bid/ask spread costs, online brokers have numerous other fees that slowly eat away at your account as an active trader:

• Commissions - Per trade fees can be $0-$10, really adding up through high volume trading. Even $1 commissions on 100 trades per week costs $5,000 a year.
• Account Fees - Accounts tailored to active traders often have monthly charges for market data access, research tools, account minimums and other features.
• Margin Interest - Trading on margin debt to amplify positions lets you overextend and incur interest expenses charged daily.
• Short Stock Fees - When short selling, all brokers charge daily fees determined as an annual interest rate charged on the market value. These fees vary widely across brokers and increase costs.

Similar to spread costs, individually each of these fees seems negligible on paper. But an active trader will incur hundreds if not thousands a year in these assorted brokerage fees that directly reduce your bottom line profits.

Accessible Margin Can Lead Traders to Overtrade

Finally, many new traders drawn in by the lure of amplified profits don't realize they actually end up overtrading due to easily available margin. When you trade on margin - essentially borrowed cash from your broker using your account as collateral - you can enter much larger positions.

However, accessible margin also psychologically obscures the true dollar values traded leading to rash decision making. New traders on margin frequently:

• Overtrade beyond capital size they should responsibly deploy
• Convince themselves positions are smaller than reality
• Take risks well beyond their account tolerance due to feeling less real money is at play

Margin can be used responsibly, but rarely is this emphasized to beginners. Instead they see it as "free leverage" leading to trades multiples larger than wise. This overtrading tends to accelerate losses from the many typical beginner mistakes.

Tax Implications Are Often Overlooked

Another key area rarely covered adequately with new traders is how short term trading profits are treated at tax time. When you've been convinced to start actively trading, visions of growing your account balance dance in your head - not complex tax accounting procedures.

Yet dealing with taxes properly is crucial to determine your true bottom line profitability from trading activities. Getting this wrong can result in tax bills exceeding your net gains.

Trading Profits Are Taxed as Income

Unlike long term investing subjected to lower capital gains rates, all short term trading profit (under 1 year hold times) are taxed at your ordinary income level. These income tax rates typically exceed comparable capital gains rates. For example:

• Short term trading gains for an individual are taxed at 10%, 12%, 22%, 24%, 32%, 35% or 37% depending on total annual income.
• In contrast, long term investment gains see preferential rates of 0%, 15% or 20%.

These income tax rates on all your short term trading significantly reduces your actual profits compared to the growth seen in your account. Every gain you withdraw to spend will have 25-50% automatically withheld for taxes in most cases.

Need to Track Gains and Losses Yourself

As an active trader, you must provide detailed records at tax time of the dollar amounts for:

• Each profitable trade with dates, share amounts, and net gain
• Each losing trade with dates, share amounts, and net loss
• Total volume and dollar amounts bought and sold

Unlike with a regular brokerage account, your trading platform will not track this for tax reporting purposes automatically. Getting audited with incomplete or inaccurate loss/gain records will result in large reassessments, interest, and penalties.

The obligation of meticulously tracking trading volume and P&L falls entirely to the individual trader. This full time administrative job is rarely disclosed as part of trading, but vital to avoid major tax issues down the road.

Failing to Plan for Taxes Reduces Profitability

Finally, with taxes eating up 25-50% of trading gains not held over a year, proper planning is essential to avoid massively reduced profits:

• If withdrawing trading gains pre-emptively without setting aside estimated taxes, you ensure a large final tax bill and compressed profits
• If hoping to maintain positive balance through a year where you net lose overall, ensure you have cash reserves saved for taxes still owed on profitable trades from earlier periods

Taxes cannot be an afterthought or you may find your entire trading "profit" consumed through a surprise tax bill from the government. Planning conservatively for taxes on withdrawals and having cash reserves set aside is crucial.

Thinking through tax implications rarely gets covered alongside rosy projections of tradingprofits. But this dry reality will determine how much you actually get to keep.

It Takes Significantly More Time Than Expected

Another surprise for new traders is how immensely time and attention intensive trading is to do properly. High quality focus over 6-8 hours daily, and constant continuing education, are required to succeed.

Listening to others sell you on pursuing trading, it sounds like you can casually trade an hour or two a day around your existing schedule. Maybe place some trades in the morning, check at lunch how they're doing, then wrap up with end of day review - an easy added income stream.

In reality, here is the actual time commitment consistently successful short term trading requires:

Hours of Daily Market Tracking Needed

If trading short term price actions as a day trader or swing trader, you need to monitor live market conditions, data releases, and news events for several hours almost every trading day.

Being available when volatility ramps up, and remaining vigilant of trend reversals, is mandatory no matter your specific strategy. Opportunities and hazards alike emerge rapidly so your eyes better be glued to the screens.

You simply cannot reliably trade around a separate busy schedule because market conditions demand immense focus when liquidity flows heavily. Failing to track and act for even an hour can mean missed profits or letting sudden losses get out of control.

Constant Learning Required

Alongside those long hours actively analyzing data and events, successful trading requires constant self-education:

• Studying charts, indicators, and models during evenings/weekends to refine technical skills
• Researching economic trends, money flows, geopolitics to understand macro narratives
• Learning new analytic approaches, psychology hacks, risk management tactics
• Keeping pace daily as breaking news shifts market fundamentals

Expectations of quick easy profits underestimate how much persistent studying underpins reliable trading. Ongoing learning sobreconomic causality and statistical analytics is essential to even maintain skills, let alone improve.

You won't last long trading profitably on limited historic concepts without investing serious time continually developing expertise. The "easy income" myth definitely does not highlight full immersion learning.

Less Trading Opportunities Than Expected

Even with dedicating your day to market tracking and spending free hours self-educating, the dirty secret is...there still are not actually that many good trading opportunities daily.

Certain market conditions offer better reward potential versus risk, especially given bid/ask spread costs and commission fees. Rashly overtrading chasing any seemingly volatile price action is extremely hazardous. Patience during the "boring" periods is pivotal.

Across a typical week, many traders report only 5-15 quality trade setups with favorable asymmetry between profit upside and loss downside. Overeager beginners end up overtrading low probability events out of impulse or impatience, haemorrhaging money.

The time commitment around trading feels extreme relative to sporadic windows of wise trade entry. This waiting game hoping for ideal volatility mixes long hours with intermittent action.

New traders seduced by visions of exciting nonstop trades would benefit from understanding great patience, extreme mental stamina, and only periodic opportunities actually underpin this work.

Luck Plays a Much Bigger Role Than Disclosed

With trading marketed as intuitive money making for anyone with drive, new traders rarely grasp how fundamentally luck drives outcomes. Skills, research and knowledge matter greatly in risk mitigation and swaying probabilities. But random chaos and uncontrollable events directly impact results daily.

Over long enough periods trading rationally, the “skill factor” consolidates positive expectancy toward profitability. Yet over shorter time frames, sheer randomness easily overpowers expertise.

Market Volatility Impacts Outcomes

At its core, trading revolves around perceiving emerging price action and volatility shifts before the rest of the market. But even for seasoned professionals a large component of volatility triggers remains completely unpredictable and chaotic.

Global markets are infinitely complex adaptive systems with so many overlapping inputs. While historic quantitative patterns offer clues about probabilities, certainty is impossible. Sudden news events, data shocks, economic policy shifts, black swan geopolitics, investor herd mentalities, and more ensure prevailing volatility emerges randomly.

Over weeks or months the impact from uncontrolled volatility exceeds that of informed trade entries repeatedly.

World Events Move Prices

Aspects of market volatility directly trace to major world events impacting investor psychology, cash flows, risk appetite and more. However these are completely external variables impossible to consistently forecast. Things like:

• Natural disasters
• Surprise corporate earnings
• Cyber attacks or security breaches
• Supply chain crises
• Viral pandemic outbreaks
• Regulator investigations
• Geopolitical conflicts or agreements

Attempting to rationally analyze markets amidst such unpredictably high impact developments grows highly speculative. Global networks have complex emergent properties near impossible to model reliably.

While sufficiently irrational, Galacticbrain traders try building “chaos models” to trade volatility from random world events...for most the better move is acknowledging uncontrollability.

Successes Highlighted More Than Failures

Finally, new traders rarely hear about the long chains of trading failures experienced by most seeking to profit from market speculation.

Survivorship bias ensures traders achieving psychologically exciting windfalls or 10,000% returns garner press coverage and go viral on social media. Yet their low probability outcomes stem partly from randomness beyond replication.

Meanwhile, the huge majority quietly losing money or underperforming for months to years elicit no attention. But their failure to leverage such a complex system reliably is closer to a base case expectation. Behind each headline trading “prodigy” lies one hundred washouts.

Without balanced understanding of failure rates over long timelines, beginners envision fortune fast. Actually sustainable profits demand respect for prevailing randomness that induces mass losses amidst scarce big winners.

Getting Properly Prepared For Trading

If reading the above hasn't scared you off trading entirely, hopefully it sets more realistic perspectives about the commitments involved and uncertain profitability. Going in with clear vision and adequately prepared increases your odds of long term consistency.

Ask Lots of Questions Before Starting

Don't let anyone rush you into trading before getting all your questions answered about the typical challenges of translating financial research into tangible profits. If those encouraging you to trade cannot educate you about crisis management, loss prevention, and risk control, you may want to wait.

Learn Risk Management Best Practices

Study all the collected wisdom about prudent risk management: position sizing, stop losses, balancing upside targets with downside thresholds, separating high probability vs high reward setups, etc. Master tight risk parameters before worrying about profit scaling.

Start Small to Test Skills Before Increasing Size

Trade tiny while rigourously journaling learnings to benchmark performanceregularly before worrying about compounding gains. Proof profitability over long samples before raising risk dollars. Measure Sharpes and set risk ratio requirements.

Have Realistic Expectations

Finally internalize that trading itself is quite hard with long ramp up periods to expect. Success demands both strong mental skills and market skills built in tandem. If tolerances and motivations rely purely on making money, burnout likelihood soars. Pursue excellence over gains with probabilities in mindset.

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