LACK OF BASIC FINANCIAL MARKET KNOWLEDGE
Most beginners tend to believe that trading does not require any great theoretical knowledge of the financial market. And because reading a few chapters from a university book is boring “not for me” people just skip this part of their education.
90% of those who start trading options have no clue about what moves the price of options and get a surprise every time they look at their trading account to check if they are in profit or loss.
What everyone wants to learn is: winning strategies! There is no way to make them understand that even if a winning strategy exists, it won’t be successful if the person who applies it places wrong orders.
The only teachers they will trust are a string of losses due to rules and laws that the financial markets follow that they have ignored.
Until that point, anyone who contacts our company usually just asks for winning strategies, and I am pretty confident that this situation will not change.
I cannot blame the natural human attitude to achieve results without doing any effort, but I do blame the brokers and educators who fool people with aggressive “get rich quick” marketing.
Even a good trader who legitimately teaches their techniques to make some extra money will be forced to make everything very simple. Otherwise, students get bored and tell their friends not to go to that teacher.
It’s not easy to make an effort when the outcome is not immediately obvious. For example, when I first went to the gym twenty years ago, I did not listen to my trainer when he told me that without a strict diet, I could not put any muscle on. I eventually started to believe him, but only after I had seen for myself that he was right.
In the case of trading, the moment of realization that they should have listened to whoever told them that learning strategies would not be enough to make money will only arrive when a big loss occurs.
This is really a price that is much too high to pay to understand something that was obvious from the beginning—especially when you have probably been warned many times.
If you read my articles, I tend to repeat that knowledge is important to be financially successful every few lines—and I won’t stop doing that!
I received an email a few months ago from a guy asking me what to do after he received an “unexpected” margin call from his broker while holding a short position on a call on VIX futures after a spike in volatility. I don’t have an answer to this question as it is usually too late. I don’t know exactly how much he has lost, but for sure, studying how complex derivatives, such as options on VIX, work before trading them would have cost him much less.
I could keep entertaining my kind readers with a lot of horror stories about portfolios that went bust because of “bookphobia”!
In the case of simple algo trading, some high school math and statistics are a necessary prerequisite.
To be able to develop real quantitative strategies, the amount of math you need to know before sitting on a desk and writing your first line of python code is really huge. But also, before back-testing the efficacy of a simple trading rule, such as “buy the minimum of the last n days”, a tiny bit of statistics is absolutely mandatory.
Because of this incredible epidemic of mathematical ignorance, trading system sellers or signal providers have a really easy time selling traders a lot of nonsense, like a 95% success rate strategy or other pseudo-scientific fluff!
Unfortunately, no retail trader I know who uses Trade Station or Multi charts to test and implement algorithmic trading strategies does not even know what the central limit theorem is.(Do you know what is it? Go on Wikipedia.)
Knowledge in the financial market is an edge over other traders, but it is also a hedge to protect against the risk that comes for no money.
Warning: There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Commodity trading involves a certain degree of risk, and may not be suitable for all investors. Derivative transactions, including futures and forex, are complex and carry the risk of substantial losses. Past performance is not necessarily indicative of future results. Please read additional risk matters on our web site www.londontradinginstitute.com
It is important you understand all the risks involved with trading, and you should only trade with risk capital. This communication is intended for the sole use of the intended recipient and is for informational purposes only. It is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument.