This article is essentially for anyone starting out in the markets, but the question of why one is trading is relevant at all times.
The question as to what motivates the individual to start trading or continue trading is very important because many reasons are poor reasons and the so-called "motivators" can contain hidden traps.
Often people trade for a number of reasons, not just the obvious one of wanting to make money, and frequently these other reasons are at a sub-conscious level, and would not normally be disclosed if someone asked the question "Why do you trade?"
Below is a list of motivators. This is designed to be fairly comprehensive and typically three or four from the list will apply to each individual. Clearly not all the motivators will apply to each trader.
The list will briefly describe the motivator and then go on to explain the trap associated with it. It will be seen that nearly all the motivators could be regarded as bad reasons for trading, and that if trading for that reason, failure is likely. By extension, it also means that many people are unsuitable for trading simply because they want to do it for all the wrong reasons. There is a degree of overlap with some of the motivators, but they each contain one important criteria which makes them different from the rest.
THE MOTIVATORS (WHY TRADE?)
A) The desire to make money
The first, and most obvious motivator. It is one of two primary motivators together with C) below. The desire to make money could be broken down into many sub-headings, e.g. wanting to achieve growth, income,
hedging inflation etc. but ultimately anyone who comes to the market is looking to gain financially in one way or another.
This means that
traders and investors can have tremendous difficulty in accepting and taking losses due to the conflict with the motivator. The refusal to accept and take losses quickly while they are small is probably the biggest contributing factor in the failure of most traders.
B) The desire to make easy money
Not the same as above. This is in fact the motivator that attracts many newcomers because the markets look a lot easier than they are, plus there are many people with a vested interest in saying that anyone can learn how to do it. Given a choice between easy money and money you have to work hard for, it’s obvious which path most people would choose. Once it becomes clear (fairly quickly) that the novice can’t extract easy money from the market, he or she will just give up. Some, however, will reassess things. The typical line of thinking goes: "OK, it’s not as easy as that, but if I work hard at it, read books, attend courses, use resources such as T2W, I think I can eventually succeed."
Now an important shift occurs. Their motivator is no longer B) but changes to A). The difference is attitude: one is realistic, the other isn’t.
C) To prove we’re right/smart
The second primary motivator. The need to be right is a major reason why people can’t take a small loss when they have the chance. They see a loss, no matter how small, as an admission that they got it wrong, thereby conflicting with the motivator. This, coupled with the desire to make money, can be a lethal combination for the unwary. Most people place their ego on the line when they place a trade, so a loss is a blow to their self-esteem – it hurts not just financially. In order to avoid this humiliation, the loss isn’t taken, which simply invites the market to hand them an even bigger one.
D) The excitement, entertainment and action of the markets
Anyone who enters the markets for these reasons is almost certain to fail. This type of motivator means that constant participation is necessary in order to get the "buzz" and stimulation. Trades will often be placed just for the sake of having a position and something to do, which leads to impulsive trading, which is nearly always poor. Boredom drives many trades. Patience – a key requisite for the best set-ups – goes out of the window and the trader who craves action sacrifices an essential discipline. Since the markets are essentially a game with no end point, constant participation is perfectly possible, and this leads to high levels of stress which undermine performance and shorten the trading lifespan.
E) To gain a sense of independence and control
For many people, their income is controlled by their employer, although they can increase this through bonuses or promotion. The markets, however, appear to offer the chance to completely control one’s income – a very attractive proposition. Independence of course does not simply mean financial independence – being able to work one’s own hours and having no boss will be equally important for many.
Unfortunately, especially for the novice, money can not be extracted consistently from the market just like that. Indeed following a series of losses, the trader who has given up a regular (and regulated) income in order to trade, will start to think that it wasn’t such a bad deal after all. The motivator of independence assumes success, which of course can not be guaranteed.
F) The thrill of winning
This is not the same as A) The desire to make money. The thrill of winning is a psychological pay-off rather than a material benefit. It is interesting that the thrill of the occasional win is enough to keep most people playing a losing game, whether it is in the markets or elsewhere, e.g. the national lottery.
Most option traders lose overall, yet most will be able to show you some enormous percentage gainers. Such wins feel great, and repeating such a feat would be highly desireable. People who play fruit machines for hours tend to lose – and they know it – so why keep playing? Because every now and then the machine pays out a large win, and for that moment they are "a big winner" even if overall they’re down.
G) As a means of gambling
Some people see the markets as just another form of gambling, which they can be if you don’t know what you’re doing or even if you do but take very high risks. But low
risk, long term investing is far from gambling – most people will pay off a mortgage or receive retirement income using the markets in this way.
So it depends on your approach. But if the market is used for gambling, then this is a poor reason for trading as the negative edge will eventually have the same effect as the house edge when playing roulette.
H) Everyone else is
Some of the greatest crashes in history have occurred because people traded or invested for this reason. It may feel comforting and reassuring to do what the vast majority are doing, but in the markets a contrary approach would probably be better in such circumstances.
Some overlap with C) here. You are at a party and someone asks you what you do. You tell them you are "a trader". If you are simply answering the question, fine, but if you really want everyone to know that you are a trader then perhaps your ego is playing a significant part. Watch out for thinking along the lines of "I’m smart enough to be a trader and you’re not."
J) You have to
fund managers only because it’s their job. No-one else has to trade, which gives private investors a huge tactical advantage which is frequently thrown away, partly because of D) If you don’t have to trade, you can wait for ideal conditions or set-ups before you do trade, which tips the odds in your favour.
K) As a hobby/interest
The markets can provide a stimulating, challenging and potentially profitable activity. As such, it’s hard to beat as an interest – there’s always something to look at. This motivator doesn’t come with any hidden agenda or trap, but care needs to be taken to ensure it doesn’t wander or start to overlap with the others above.
So, a fairly comprehensive list of why people play the markets. Traders and
investors need to understand how seemingly valid reasons or motivators can provide potential traps, and once this is done their impact will be considerably reduced.