How to make money in the stock market - Part 1

Hi, welcome to this new video. Have you ever wondered why some people seem to be able to make a lot of money in the stock market while others cannot do it? What is the secret? How can they do that? That's exactly the topic of this video. So I want to touch the main reasons why some people are profitable. What are the key factors they focus on? And, and what are the factors that the losing traders focus on when they approach trading? The three main factors that usually people are looking at are those consistency, profitability and very high winning rate. Okay, so what is consistency? Well, very easily consistency means that the system, the trading system you are using is able to give you similar results in the long term. The profitability is, well, of course that the system can make money. And the very high winning rate is a system where you are right most of the times, maybe out of all your trades, 90% of them are winning trades. So this is the third factor. And these three are determining if you are profitable or not. Or better say what you are focusing on among these three factors will determine if you will make money or not. And there are basically four profiles that you can identify. These four profiles here, the number one profile is when you focus on the three factors together. So you want a system that is making money with a very high winning rate. And you can do that years after year. And I will call this kind of situation the crystal ball or holy grail. The number two is when you say, okay, let's drop the consistency and only focus on a system that is profitable and a system where the winning rate is very high. And this can happen in two situations. Either you are a beginner or you are facing salespeople that is trying to sell you a system. Okay. And we will see these four profiles more in detail later. For now, I just want to present you, want to present this to you. The number three is when you drop the profitability. So you are focusing on a system where the winning rate is very high and is consistent. Unfortunately, it will be consistently losing money. So this is when people are afraid of trading. They actually, they are afraid of having losing trades. That's what happens. And the number four, that is where you should be aiming at is people who can consistently make money and they are not really concerned about, about the very high winning rate. And this is when you can be a successful trader. So let's move on and check these four examples, these four profiles, more in details. Okay, number one, holy grail, crystal ball. So as I said is when you want to focus on everything, you want a system where you make money, where you can do it in the long term. Consistency. And yeah, it's profitable. Problem is this kind of system is almost impossible to get. It's almost impossible to be able to have a trading system like that. And at the beginning people may look exactly for. This is the so called holy grail, this secret strategy where you never lose and you make money every single time. That is equivalent to know in the future, right? If I know beforehand if the price will go up or down, of course I can make money every single time. But it doesn't work like that. And even with the advanced methodologies like machine learning, for example, where people are trying to predict what will happen in the stock market is very hard to be consistently profitable. So this system is not what you should be looking for because it's almost impossible to be here. And there is a very nice quote from a very famous commodity trader, Larry Williams, who really summarizes this concept. And the quote is like, people who make their living looking to crystal balls. So in other words, trying to predict the future are destined to eat a lot of broken glass. So definitely this is not the right way to go. The second one is beginner or salespeople. Okay, here what is the difference? The focus is on profitability and very high win rate, but not on consistency. Okay, let's start with the beginner first. Maybe when you started to trade, this happened to you. Or maybe, you know, people in this situation when they started to trade for maybe a few weeks, one month, it seems that every trade they placed was a winning trade. Okay? So they say, oh my God, I'm so good. I just started to trade and it's one month and I almost never got a losing trade and I'm making money. So they say, okay, I am very profitable and I have a very high winning rate. But the key question here is, is it consistent? Can you get the same kind of results month after month and year after year? Because it's very easy to have a short sequence of winning trades, but it doesn't mean that it will always be like that. And especially this is very dangerous when you are a beginner and you start with a series of winning trades. When? Why? Because you may think that this is the norm, this is what should happen, right? So when you start to get losing trades and losing trades will come sooner or later, then you will be feeling pain. You will start to adapt your system. You will say something like, oh my God, it doesn't work anymore. Or maybe wait, I should change something or let me switch to Another system and that's when you will start to lose money. So again, as a beginner it seems good to start with a lot of winning trades, but is not really a good thing. The number two is people who are trying to sell you a system. So what do they say? They say, you know, we have this system is very good because the winning rate is crazy and you make money. They just forget to tell you that maybe you cannot really have this kind of crazy results in the long term. And I want to share with you situation about this. It happened to me recently. So on Facebook I keep seeing these ads from this guy who claims that he got a system where you are able to get thousand percent. Can you imagine thousand percent easily? And of course many people were writing comments. Some of them were asking where can I buy the system? And other people were less impressed. And especially there was this guy who comments something like, well you know, you are telling me that your system can make thousand percent and it's great, but is it really consistent? Can you really replicate this kind of results in the long term? And the reply from the guy was selling the system was well you know, of course no, you can get this result once in a while, but it doesn't mean that you will get this result all the time. And so the person who wrote the first comment replied, oh well, thank you. So you are selling me a system and you're not telling me this information is not intellectually honest to do something like that. And I agree. But you have to understand that when people are selling you stuff, of course they don't want to highlight the less convenient feature that in this case is the consistency. So now you know that next time someone is telling you, oh you know I have this system is very good, make a lot of money, very high winning rate, then you know what you have to ask them, is it consistent? Can you show me the proof that this is happening month after month and year after year? And by proof I don't mean you tell me or you show me an Excel file. I want to see a certified brokerage account report where I see that you are getting these results. And it's almost impossible that they will give you that. Because think about that. If you can really do consistently a thousand percent, even a year or even every two years, why the hell are you selling a system? Just trade your money and you will be so rich in a few years that you don't even care, right? You don't care about the thousand two thousand dollars that you get from selling this stuff, right? So Maybe is not really a good system. Let's move to the third one. Okay? The third one I think is better is moving to a profitable trader. But there is still something to fix and this is very important. So here we have the people that are afraid of trading. Why they are afraid because they are afraid of losing trades. In other words, they want. They are looking for a method that is, yeah, consistent. But the real focus is they want a very high winning rate. And why is that so? Because the focus is basically. Well, actually if I have to explained in a simple term, I think the. The main reason is that everything is based on a belief that you have that is wrong. So what is that? Remember when you were a kid, your parents teach you that you must do the right thing, right? Because if you do the right thing, then you get a reward. And then if you do the wrong one, you may get the punishment. And then you go to school and then it's even worse, you have your exam and then the teacher is telling you in order to pass, you must give me a lot of right answers. And if the wrong answers are too many, you will fail. So you start to create this system in your mind that being right is equal to succeed or success. And this is what many people think because again, that's what society is teaching you. Problem is in trading, it doesn't work like that. So when you are focusing on very high winning rate because of this belief, you think that is equivalent to become successful. So if I have a very high winning rate, according to this belief I should be successful, hence I should make money. But that's not true. And so what is the result? The result is that you will be, yes, consistent, but in losing money. And I want to show you with an example what I mean by that. Of course, if you are 100% right all the time, you will win money, okay? But you will never be able to be 100%. So. But let's say you are 90% right. And we want to compute what is called expectancy of your trading system. What is the expectancy is basically a number that if positive means your system is making money. If negative it means your system is losing money. So let's say you have a strategy where the winning percentage is 90% and the losing percentage is 10%. Seems a pretty good system, right? And let's say that is also consistent. Okay? So you are consistent. So month and year after year you get this result. Now what is the problem here? There is a missing part is how much do you win? When you win and how much do you lose when you lose? For example, let's say that when you win, you win $1. But when you lose, you lose $10. So what is the expectancy? Now the expectancy can be computed as the winning percentage times how much you win when you win, plus the losing percentage times how much you lose. So minus $10. And this number is what is 0.9 minus 1. So is 0 point, sorry, minus 0.1. So this is negative. So this is a losing system. In other words, by focusing on the high winning rate, you are not considering that when the losing trades come, they may just one losing trade might wipe out all the profit that you have done so far. And this can be explained by the fact that people are, especially if they are afraid of losing, they may take profit too early. That's why you may have a very low number here. But here, because people want to be right, then they may wait and they may hope that the price is going back. And then eventually they are losing a lot of money. Okay, so the main point is you need to clarify what is your objective? Is your objective being right or making money? And again, according to this belief here, you think is the same, but it's not the same. We have seen right now with this example that is not the same. So unless you really clarify where you want to be and usually people want to be here, you will not be able to overcome this limitation. Now some people may say, okay, maybe this is true in trading. What about investing? You know, investing is long term, so I don't have to look at trades, I don't have to trade many times. And so the odds to have a series of losing operations is less. Okay, it's true. But even in investing, this fear of not being right will come out just in a different form. So long term investing, usually you buy a stock or something that you think is good. And so in the long term is going up. Nothing wrong with that. But once in a while you may be wrong as well. Maybe the company is not as good as you thought, or maybe some news will change the stability of the company. So something that was good when you bought now is not good anymore. And now there will be this issue coming again. Because usually when you do long term investing, you don't have a stop loss, okay as trading. So suppose you buy and then it was going well and then you start to see bad news and the company is not as good anymore. So you will never buy that company now. But since you are already in, then you will start to feel bad about Selling, you don't want to sell because it means that you were wrong and you don't like to be wrong. So what will happen that oftentimes you will keep your losing stock for way too much and then eventually you will lose a lot of money because you don't have a stop loss. So this is to say that this kind of issue, this challenge that is basically related to how we use our brain, is always there. You can be a trader, you can be an investor in one form or the other. It will always affect you unless you know how to deal with that. But we will see this later. Let's move to the next one, the successful trader. That's where we want to go. So the successful traders focus on two things, things out of these three and the most important. So the successful trader is the one having a system that is consistently making money regardless of the winning rate, because he or she realizes that the winning rate is not really the key factor to determine if you're going to make money or not. And usually is focusing on the long term results. What does it mean? It means that even if there is in the short term a series of losing trades, it will not lose faith on the system because it will understand that trading is a game that must be played. If I can use this terminology in the long term. Right? So well, it's very easy to say that, but in order to be able to get here is very important to be able to effectively manage your emotions. Because we have seen in the previous examples, the problem is when your emotions are affecting your trading, when you start to have losing trades, you start to lose faith on your system and then you start to change it or you may feel bad and then you are looking for again the holy grail. So this is the key difference. In order to become a successful trader, you really must be able to manage your emotions and don't let your emotion affect your judgment. And I know this is very hard to do. So in the next part of this video, I will show you one way, one simple technique that you can use to better deal with losing trades so that if your system is profitable, and by the way, finding a profitable system is not really a big deal. You can find so many information online where people are willing to share with you systems that are profitable, that have track records of being profitable. Some of them you have to pay, but there are free ones or very cheap. For example, if you, if you take the book, the Turtle Traders, that was an experiment done many years ago where two traders wanted to teach to people without knowledge in trading how to become successful and they were and they got crazy result. And the system is described in the book, so you can just replicate the system. But again, the system there the winning rate was low. So what was very difficult and that's also explained in the book, was to manage emotion when the losing trades were coming. So again, in the next video I will show you how to better manage your emotion and a simple trick that you can apply in order to don't feel so bad when there will be a sequence of losing trades. So for now, thank you for watching. Please subscribe to the channel if you found this video useful and especially if you want to be notified when I will publish the next one. Thank you again and see you soon.