How to avoid being in the deep end without a life jacket

Why do seemingly intelligent people do dumb things when it comes to the share market?

You would think that smart people would do smart things. However, when it comes to trading, doing what is smart is not always foremost in the minds of novice traders.

Let me ask you, if you didn’t know how to swim, would you jump into deep water without a lifejacket?

Whilst the water may look inviting, a smart person would decline as logic suggests that the chances of survival would be low. We all know that the best way to learn to swim is under trained supervision in shallow water where you can touch the bottom in case you start to panic. Panicking in deep water is a precursor to drowning. But what does that have to do with trading?

Quite simply, many traders start out in deep water before they have learnt to swim.  They jump straight into trading highly leveraged markets such as Forex (FX), Options, and CFDs without a lifejacket, only to realise their mistake when they are in deep water and drowning.

Unfortunately, novice traders are generally seduced by ads promoting that anyone can achieve financial freedom quickly through trading highly leveraged markets.  For some reason, as I mentioned previously, many otherwise intelligent people turn off their brain when they see this marketing hype and do dumb things like opening up an FX account when they have never bought a share in their life.

It is not my intention to convince you not to trade FX, as this vehicle can provide the opportunity to make a lot of money. However, your experience and the result is likely to be better once you know how to swim!

Let me get one thing straight, a trader is what a person becomes by acquiring the right knowledge, building their skills and gaining experience in the market. But how do you gain the right skills and experience if you haven’t built the foundation to trade right first?

It is important to understand that FX, CFDs and Options are simply leveraged vehicles through which to trade, however, if you don’t know how to trade shares, how do you expect to succeed in a leveraged market? This probably explains why all too often we get phone calls from FX traders who tell us they are doing okay, but in the next breath they ask us to teach them how to trade.

This usually means that they are inconsistent and are losing, or are not very profitable, and they don’t really know what the solution is to correct the challenges they are facing. In other words, they are drowning in deep water, and don’t really know how to swim properly to get themselves to where they want to be.

If you want to call yourself a trader, you need to know how to be profitable in all markets. I tend to find that individuals who haven’t spent enough time learning how to be a trader don’t have a deep enough level of understanding to be able to…