Learn before you start trading or investing

The knowledge gap represents the gap between the knowledge you already have and the knowledge you need to know for the particular task. The probability of making trading mistakes or wrong investments becomes much smaller if your knowledge gap is small. How much do you currently know about trading stocks or crypto? How much time have you spent on the subject?

Reading time: 5-7 minutes (1.300 words)

Key concepts in this chapter​:

  • The knowledge gap represents the gap between the knowledge you already have and the knowledge you need to know
  • All beginning traders and investors have a huge knowledge gap
  • An event is something that happens without the need of spending any effort.
  • Progress is the process of closing your knowledge gap (learning) and start taking action.
  • Becoming a consistent profitable trader or investor over many years takes hundreds or thousands of hours of learning and taking action.
  • Stop chasing events, start working on progress.

Most people try to find workarounds for complicated tasks. They are excited to start but not willing to put in the time to find out the details for whatever reason or are blinded by money. For example, at the end of 2017 crypto was booming. Random people with zero trading experience started buying bitcoin and other coins. Because prices went up so fast, people had no time to think and were driven by emotions. Thinking they might become rich. But these people had no trading plan. They were fuelled with FOMO (Fear of Missing Out).

Quest: Fear of missing out
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What is fear of missing out?

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FOMO is quite common when trading stocks or crypto. Inexperienced traders throwing money at markets they don't understand and hoping it will stick. This usually happens when markets are rising quickly. As a result, most people lost their money or were stuck in a trade when the crypto market went down shortly after. Eventually, most people were selling with a loss or are stuck in the trade because they don't want to sell with a loss.


Bitcoin chart 2017/2018, source: Tradingview.com

In december 2017 the price of bitcoin went up from $10.000 to almost $20.000. Only two months later the price plummeted to $5800. You can imagine that many people bought bitcoin when the price went up and panicked when the price dropped. 

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What is bitcoin?

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Day traders also trade on emotion. They fear missing out on huge profits. They use highly risky trading techniques but overall have zero experience. It's no secret that 95% of day trades lose money in the long term. The main reasons are:

  • They don't follow a strict trading plan
  • They don't journal their trades
  • They don't backtest
  • They have no risk management
  • They jump right on the charts, set positions based on emotion and wonder why they lose all their money
  • They are trying to win back lost trades

They have a huge knowledge gap.

Quest: Day traders
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What are day traders?

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If you have overall knowledge about trading techniques, how different markets operate and how people react when something changes in the market you can prevent making mistakes. But before you can even start trading, you should close the knowledge gap on your personal finances first. That’s why the next chapter in this guide will start with the basic principles of money management.

If you start trading or investing with money you need in the future then your investment will probably fail. Many people put too much money in a trade because they are overconfident or only see $$ in their eyes. But the fact is only 5% of all day traders are making money on a consistent basis over many years. And it takes many months or even years to accumulate the knowledge, spending time to test and understanding and personalising trading techniques. And this is exactly the reason why 95% of day traders fail. They are not willing to put in the time to expand their knowledge.

Trading or investing in stocks and crypto has nothing to do with your IQ but everything with building a solid trading or investing plan and sticking to that plan regardless of your emotions. This guide will have a big focus on emotions specifically. The biggest enemy that you will face when trading and investing are your emotions and how you react to them.

2.1 Events and progress

An event is something that happens without the need of spending much effort. For example, inheriting a big sum of money or winning the lottery. Events like this can be life changing and require zero effort. It just happens. Many times events are mistaken for progress. If you know someone who made a lot of money buying stocks or crypto you might think:

Penke

“He was lucky he stepped in the market at the right time”

Or when you see someone in the gym who is very muscular or skinny:

Penke

“He simply has perfect genes, I don’t…”

Although someone might be lucky buying the right stock at the right time, many times this was driven by progress. This person might have failed for years in the stock market. But all these years he worked on closing his knowledge gap. He learned from his mistakes and now knows what might be a potential winner. From the outside this might look like an event. He just bought this stock at the right time and now he’s rich!

The guy in the gym does not have perfect genes. He worked out five days a week, had a very specific diet and followed this plan for many years. That is the only way to become muscular. Anyone can follow this same plan and will have the same results. You can’t skip progress. Some people try. They will use anabolic medication to speed up their progress. And although this might work, it might also be very dangerous. The same applies for people who want to lose weight. The progress for losing weight is very simple:

  • Eat healthy
  • Stop eating junk food
  • Exercise on a regular basis

Not a single person in the world can lose 100 pounds in a single day just by exercising. It takes many days, weeks, months and years to lose weight. Progress is built up every single time you workout and eat the right foods. Millions of people try to skip this process by taking diet pills, fancy diets and many other things to skip doing the actual exercise and stop eating junk food. Eating healthy has nothing to do with vitamin pills but eating your fruits, vegetables and healthy fats on a daily basis. But although the steps to take are simple, people find it hard to stick to the plan because of their emotions. 

Quest: Events
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Which of the following options can be described as an event?

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The same principles (for gaining muscle or losing weight) apply for trading and investing. You can’t just follow some other guy's advice or buy a script that does everything for you. This is a recipe for disaster. If you have a very profitable trading strategy or trading script, would you share this with random people on the internet? Don't blindly buy indicators, trading programs, paid advice, trading scripts and other things because one day, all these things will not work anymore. And if you did not learn anything about how the strategies actually operate you are back at square one. That does not mean that every paid program or indicator is bad. You simply don't need them to become a profitable trader.

You can't skip the progress of learning everything about trading or investing if you are serious about it. Be prepared to spend hundreds or even thousands of hours on learning before you can become a long term trader or investor making consistent profits. Stop chasing events and start working on progress. Did your mind already try to skip the progress?

Penke

"Thousands of hours...? I can do it in a few hundred.."



Chapters: Trading and Investing Guide for Beginners

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