Investment or speculations? How to make the right choice
With a turnover of $5 trillion a day, Forex market makes people go crazy. Trading and investment are a school of lifewhere the newbies lose money along with the ability to think rationally. What should one do to avoid losing the deposits and learn how to make money? The answer here is simple: forget about the ads and work on your own training as hard as you can.
How to become a pro
Believe it or not but 85% of market players make the same mistakes over and over again. Being overcome by emotions and acting impulsively, they lose money and then look who to blame instead of learning from it. Some blame the broker, the others accuse mysterious market makers, puppeteers and regular strangers. Because it’s easier that way!
However, this gets them nowhere, since stock market is the ‘gold mine’ for the world banks, the largest hedge funds and pro traders. These players use advanced computer technologies in their activities. With their help, they come up with profit-generating trading strategies and systems, as well as calculate the risks to a thousandth of a percent.
Now, picture a passionate newbie who is wondering where to invest the money and opens the trades blindly. Does he or she hope to outplay market makers? Most definitely! However, the statistics shows that overoptimism backfires.
You won’t attempt to do an open-heart surgery after watching a couple of episodes of a medical drama, would you? Even though some movies make you feel like you know exactly how it’s done. However, anatomy textbook or a few episodes of House M.D. aren’t enough to become a surgeon. One needs many years of training and long-term experience.
The same rule applies everywhere, be it an entrepreneurship or trading in financial markets. But first things first, what’s the difference between trading and investment or is it the same thing? Your financial future depends on the answer.
Trader or investor: which path to choose?
Who is the trader? This is a person who trades in financial markets, using own money or by attracting funds of the others. The trader acts relying on personal experience and knowledge. Sometimes, in order to make profit, the trader has to work at the computer from dusk till dawn, picking promising trades, analyzing open positions etc.
Successful traders throw themselves fully into what they love doing. In case you aren’t ready to give it enough time and effort, it’s best that you go for the second option and start investing.
What is the investor’s task? First and foremost, investor has to pick the right manager for his or her account. In best-case scenario, the manager will earn profit which is slightly bigger than the interest typically charged by the banks. You should remember that absolutely everyone faces drawdowns which can sometimes ‘eat away’ a large portion of income.
How does a skillful investor work
Imagine that you see a chart of a certain share with VRX quotation ticker. It shows that these shares grown from $15 to $250 over the course of 2015. The manager assures you that the company is very promising and you eventually agree to invest in it.
This is where you have to stop and give it a good thought! Do you even know what company this is and why you should invest in it? As demonstrated by this example, if the investor hadn’t asked all these questions, he or she would have lost everything. Following a dramatic spike, the price of VRX shares dropped from $250 to $15 in just 6 months.
Collapse of drug company Valeant Pharmaceuticals – the issuer of shares – could have been predicted. The company has repeatedly overpriced the medications and acted unethically. It had taken over local pharmaceutical businesses and artificially increased their cost. This approach wouldn’t go unnoticed in the U.S. for far too long. So, as you can see, research of the company’s history can save you a ton of money!
Rules to follow when choosing the manager
Before you entrust anyone with your investment account, look into the following:
1. Manager’s profitability. 15-30% are considered a norm. Those who promise more definitely overestimate their abilities.
2. Manager’s past drawdowns. The ability to stop at the right time is among essential qualities of any trader.
3. When does the manager trade and which strategy does he/she use for it? An investor should have at least some basic understanding of how to earn money based on this system.
4. What risk management approaches does the manager use and what leverage does he/she enter the market with?
Now let’s sum up
Your key two tasks are:
1. Getting the basic knowledge about the market and its arrangement.
2. Deciding on your goals and the path you would like to take – active capital management (trading) or investment.
The next steps will depend solely on the chosen path
|It takes months to master profound knowledge. You need to develop a seamless, tried and tested trading system.||Examine basic performance indicators on managers’ accounts: drawdown, profitability, leverages, the risk management system.|
Trading isn’t at all easy. Every day you have to force yourself to follow your own rules. Getting rid of hope when the position you believed becomes unprofitable. Overcoming the fear by letting the trade move to the next level, rather than rushing to close the order after getting the smallest profit.
The world of currency speculation is extremely complicated, and it doesn’t necessarily work for everyone! This is not a Russian roulette which tickles your nerves. It is a mundane day-to-day work where you have to deal with the same situations and patterns, day in day out.
What you have to do is figure out whether you are up for it. To be on the edge, deal with own emotions, work from sunup to sundown and accept inevitable drawdowns. If you feel that this isn’t for you, a better option would be to pick a few managers, distribute the money between them and your investment will certainly pay off!