This week I attended an intensive course on Trading in the US Markets. It was supposed to be a Professional Traders course. Yet most of the participants had not only never traded in all their lives, but had zero to very little idea of trading. Not to worry. They were reassured that at the end of 7 days they would be proficient traders. And by trading a couple of hours would be able to generate such huge returns that they would be able to fulfill all of their dreams. And almost everyone who attended believed.
I was there to understand how the US markets work and thereby appreciate the subtle differences that may exist between the US and Indian markets. Unfortunately the Professional Traders class spent more than 30 percent of the time teaching how to use a trading platform. And another 40 percent in doing simulated trading, all of which could and should be done at home or work by anyone who aspires to trade.
A large amount of what time was left was spent in explaining the major differentiators in trading that would make everyone rich. The theory of Supply Zone and Demand Zone, as opposed to the traditional Support and Resistance Zones. And in identifying patterns that would identify these zones and good trading opportunities. Once again, there was no consistency in identifying and it seemed to depend more on if the resultant proved the theory, the pattern was correct, else it had something missing.
The rest of the time was spent in convincing the participants how the current course was not sufficient to become rich, you needed to do the next levels which would guarantee success. And the numbers made no sense to me. If you have $5,000 to invest, you should take the $15,000 course and if you have 10,000 the $25,000 and if you have more than $25,000 the $50,000 course. In other words you would need to get a return of over 100% annually for over 3 years just to recover your learning investment. And yet almost every one who attended took the next course.
I interacted with each of the participants and all of them were very nice, intelligent people. Yet the age old lure of easy money blinds all of us. The course conductors at every stage kept talking about how everyone lies when they want something. The professionals lie to get the amateurs to invest so they can gain and we will lose. How the TV channels lie on behalf of those with vested interests, so that they can gain and we can lose. How the management of companies lie so that they can benefit and we will make losses.
Ironically, they are probably right. But forgot to mention that it applies equally to them. All of what they projected has a minimal probability of being true, just as anyone who buys a lottery ticket has a possibility of getting a few million dollars. And just like I hope each of my friends who buys a lottery or goes to Vegas is a winner, I do hope that each of my classmates in the last week find a pot of gold. But I hope even harder that in case they don't they learn quickly enough that the only certainty in trading as in life is uncertainty.
Some myths
- Professionals make money. Amateurs lose.
Anybody who has ever bothered to read the results of professional traders quickly realises how untrue this is. The second part about Amateurs losing is probably true. However since 90%+ of all trading is carried out by professionals and since most trading is a marginally negative sum game, a large number of professionals, in fact close to 50% will need to lose for the other 50% to profit.
- Make small losses. And large gains.
You can easily say that if you have a stop loss at 1x and a target at 3x, then even if you lose 3 times, and gain once, you will break even. What they haven't taken into account is that because of the difference in distance between the stop loss and the targets the probability of this happening is also close to 3:1 and so the probability of being profitable remains exactly the same. 50 : 50
- Risk is limited
This is the part where historically people have lost and will continue to. By putting a small stop loss, no one is guaranteed a limited loss. Any major event that leads to a large difference in opening or sharp movement could end up in the stop loss either not getting executed or you losing significantly more than anticipated when your trade does get executed.
- Trade Station reimburses the fees
This is the part that almost everyone got carried away with. And no one bothered to read the fine print. Trade station gives a 20% rebate within a 1 year period of the commissions, excluding the exchanges fees, taxes, ... The average person spends around $15,000. Which means he'll have to have commissions of $75,000 in 1 year. Which roughly works out to trades of over a million dollars. And the average investment in trading. Under $10,000. How likely are they to ever recover their fees?
It would be unfair to end without highlighting the various positives of the academy. They allow you to take the classes as many times as you want. And several were there for the second time, and at least 1 person for the 5th time. The instructors believe in what they say. And are themselves successful traders. And so in spite of my reservations of what they do, I have no hesitation in recommending the institute and the courses.
As long as you remember, "Caveat Emptor", an English phrase, meaning "Let the buyer beware". To which I would like to add, "Be Aware". And evaluate everything you hear. Logically. And Sensibly. And finally, there is no gold to be easily found, and even if you do manage to find it, remember what happened to the last person who did have the golden touch, "Midas".
