Why speculator can make spectacular returns?
============================================
If you want to be a successful trader, you need to know why you can rip money off the market. Of course, you can still make a substantial returns even without that knowledge, but knowing that will make you a better trader and lead a more meaningful life.
A lot of people never take the effort of knowing why they can make money from the market. Investors believe that they are entitled to the profits and losses of the company that they have invested. As shareholders, they make money when the company make a profit. On the other hands, traders thought that just by making the right buy and sell and at the right time, they can make money.
Is that simply so? The answer is NO!
To make money in our current capitalist society, you need to provide either valuable products or services to the consumers. What kind of economic services do these people provide to the consumers by investing in the right stocks and guessing right? If that what your thinking is, then investing or trading is like gambling, placing the right bet. Your returns will be like on the gambling table. Luck will play a major role.
To make money in the market, you need to know what kind of economic services you are providing to the society. The main reason why speculator or trader can make spectacular money is because they are providing an valuable service of transferring and handling risk that people want to get rid of. As for investor, you make money when you invest in company that ARE GOING (NOT CURRENTLY) to provide MORE valuable products or services to the consumers. You do not make money just simply when the company are currently do what they are doing. It is the same reason, why earning sometimes does not relate to its share prices.
[Note: I hope you understand my statement for the part of investor, anyway, to keep it short, it more difficult to make money as an investor because, first thing first, it difficult to do prediction. Secondly, how confident are you that you going to predict correctly for say the next 30 years? Warren Buffet did very well because he understand which company will continue to give added value to their consumers. But can you do what he did?]
As a trader, you are in the business of managing risk. You buy from people who do not want to handle that risk anymore. You sell if the risk is too high for you. You transfer the risk to others who are more willing to handle it, so as to say. You are able to make money because you provide a valuable service of transferring and handling risk that people want to get rid of. In addition, you provide another valuable services of providing liquidity to the market. Without traders, market could not function. And without the market, young promising company will have difficulty in raising funds to expand. Ultimately, consumers suffers due to the lack of products and services that these small companies fail to provide without the expansion.
Since your principle business activity is to manage risk, how much money you make is dependent on how well you manage your risk. Do not lose the tree for the forest! You do not make money by making the right buy or sell! That not the economic reason why you make money. If you cannot manage risk well, the market will take your money away and kick you out. The market will reward those traders that can manage risk well, so that they can continue to provide their useful service of risk handling to others.
Now that we know why we can make money from market, that is, risk management. But what are the tools available that can manage your risk in trading?
Fundamental analysis?
Go ahead if you think that the way and have the time and faith to try it out!
Technical analysis?
Go ahead if you think that the way and have the time and faith to try it out!
Let the truth be told!
To manage your risk, you just need to limit your loss per trade! What tools do you need to limit your loss per trade? It your DETERMINED WILL and your INTENTION to do so!
How much time and hard work does it need to do that?
If you can manage your risk within half hour per week using your DETERMINED WILL and INTENTION with simple strategy, so be it. The market will be perfectly alright with it. Some business need time and hard work to do well, but definitely not risk management for trader. Why chose a more difficult way of doing things when there are more simple and elegant one? My guess is that many people want to use the hard ways to satisfy their ego. To show off their intelligence to their friends/peers that they can make money using the hard ways where many others have failed!
