Trading Pros and Cons - Do you have what it takes to be a successful trader?
If you want to become a trader and wonder if it's the right thing for you, I want to give you some initial thoughts to help you ask yourself the right questions and find the right answers.
We will provide you with a basic introduction to trading. We will work our way through the entire topic. You can consider this as the starting point, the foundation, of our training to become a professional future trader.
Trading Pros and Cons
I develop a classic pros and cons list here that will allow you to make an objective evaluation of whether a career as a trader is right for you. You should weigh the advantages and disadvantages mentioned here before embarking on the "adventure of trading."
Unfortunately, too many traders approach the stock market with false, unrealistic expectations, suffer setbacks, and ultimately give up in frustration. I don't want that to happen to you. You will gain a comprehensive understanding of what to expect in the world's stock markets.
Pros and Cons of Trading
If you are a newcomer considering engaging in the stock market, you probably envision huge stock market profits in your mind's eye. However, many have barely considered the flip side of the coin. To prevent you from becoming one of the unsuccessful gamblers who give up after a short period, either bankrupt or completely disillusioned, we will provide you with a detailed explanation of the advantages and disadvantages. This way, you will have a comprehensive impression and a basis for your decision.
To provide an objective evaluation of whether a career as a trader is right for you, we have created a classic pros and cons list, which we will now explore.
The list: Trading pros and cons
No grace period, and no one takes consideration
- The stock market is a shark tank and everyone is fighting against each other. Whether you're a beginner or not, it doesn't matter to those on the other side. Everyone is out for themselves.
- In other jobs, you usually get more responsibility gradually, but in the stock market, you're 100% responsible for your success from the very first second.
Strong emotional stress (emotional rollercoaster)
- Depending on the trading style, sometimes more, sometimes less burdensome.
- When one is making a profit, they could feel elated, and when experiencing a loss, they want to disappear into the ground. And when the mood changes with the market's fluctuations, one can feel like they're on an emotional rollercoaster.
- Greed, panic, anger, and fear can lead to very poor results when there is not enough distance from the market and when money management is too risky.
- Pride is also dangerous. After a great winning streak, people tend to become greedy and increase their risk. The top priority should always be: ALWAYS stick to your system!
Jungle of possibilities and financial instruments
- There is a variety of different financial products. As a beginner, it can be easy to lose track. The advantages and disadvantages are often not apparent to beginners.
- Whether it's ETFs, CFDs, options, certificates, futures, or stocks. Many beginners cannot properly classify the products and therefore cannot weigh the risk well. The possibilities for the corresponding trading style are also added. There is a lot of potential for making wrong decisions which can lead to large losses.
No red thread, many dead ends, and wrong turns
- Since you are left to your own devices on the stock market, there is often the typical "trial and error" situation. You try something, you lose money, you try something else, lose money again, and either you eventually find something that suits you and makes money or you give up. That's why there are so few people who are sustainably successful in the stock market. Giving up and cursing the stock market is easier than sitting down and doing it right, and getting professional help.
Long training time, even longer without education
- In theory, anyone can start trading with real money right away. Many actually do this and end up getting burned. Nobody would just get into a car and drive off without learning how to drive first. Yet, people do this all the time in the stock market and then wonder why they lose money. It needs to be learned. One can either take the difficult path through the valley of 1,000 attempts or pursue a professional education. Both lead to success, but one of them is significantly faster.
No hourly wage or guaranteed profit
- Even if you sit in front of your computer for 24 hours a day, it is possible to make losses. More does not automatically bring more. Accepting this is difficult, which is why beginners often trade a lot because they believe it will earn them more money. Usually, the opposite is true.
Total loss possible
- With brokers that have a margin call obligation, theoretically even more than what one has invested.
- There are not a few who have lost their trading accounts multiple times in a row.
- And when one has lost the money, thoughts come to mind about what one could have bought with it.
- In the stock market, there can only be profits if one is also willing to take risks. That's how the game works. The trick is to win more than you lose.
Like with all business models, external circumstances can lead to losses even if the trading strategy is profitable (natural disasters, financial crises, broker bankruptcies, etc.).
- No matter how thoroughly everything is planned, there will always be that one situation that has never been seen before. A robust strategy shines in the moments when other strategies reveal their deficits.
- Criticism, mostly well-intentioned, sometimes from family members who consider trading to be unreliable. Then, it often happens that traders try to conceal temporary losses to avoid giving negative opinions any fuel. Traders hear sentences like "I told you so" most frequently. This can lead to questioning one's own trading, even though it is known that losses are an absolute part of it.
Entry barriers are low
- Anyone can start
- Little evidence of experience required.
- No licenses, certificates, etc. needed.
- Just raise capital and you're good to go.
- Theoretically from any location in the world, provided there is an internet connection.
- Even at the beach or by the pool (although less professional).
- One's own actions have consequences, and nothing else.
- No one gives instructions, one is on one's own.
- One's own actions have consequences, and nothing else.
- No one gives instructions, one is on one's own.
Sky's the limit
- As an employee, your hourly wage will eventually be exhausted no matter how many hours you work. There's no limit in the stock market.
- Through the power of compound interest, your performance can exponentially grow with consistent money management.
No one to answer to
- No boss or supervisor will demand an explanation.
- Complete freedom in your own decisions.
- Only yourself will you need to answer to.
No rules or formalities
- You don't have to maintain etiquettes like dress code, polite phrases, small talk with colleagues or bosses.
Low overhead costs
- only software, hardware, internet, and order costs,
- no rent, advertising costs, car, etc.
No dependence on customers
- We don't have to worry about customers, we buy and sell with a click of a button, without having to convince anyone to buy. There are always enough buyers and sellers in liquid markets.
No contracts, rules, or deadlines
- We don't enter into contracts, we can start or stop our activity at any time.
- We can change brokers anytime.
- Breaks and vacations don't have to be approved.
- We don't have to trade if we don't want to. No one will come and remind us of a contract.
Flexible (you can trade anytime as long as the market is open / during trading hours)
- You can incorporate trading into your daily life as it suits you, or adjust your trading strategy according to your preferences.
- If you have limited time, you can fit trading into your day without distracting from your main activity.
- No capital commitment. If you need your money, you can access it immediately. This is different from other investment forms such as real estate.
No business license required
- Trading does not require a business license.
- It does not complicate tax filing or involve any bureaucratic hassle.
Perfect for long-term travelers, as trading gains are nearly tax-free
- Since theoretically, all you need is a laptop, you can trade from anywhere. This means you are not tied to any particular location.
- If you are also deregistered from Germany, you are not subject to the capital gains tax.
Easy to calculate risk
- Unlike most other business models, you can easily calculate your risk... However, you must also stick to it.
Part-time / Second job
- Due to the flexible nature of trading styles, it is not necessary to decide to become a full-time trader. Trading is very well suited for increasing your wealth on the side.
- In times of negative interest rates and overpriced real estate, trading is a way to build wealth. We earn independently of market conditions because we can make money on both falling and rising markets. For example, see our equity curve during the Corona crisis. It increased even as prices went down.
Variable time commitment (depending on strategy)
- Time is not equal to money: Even those who can only spend a few minutes a day have the opportunity to earn much more than day trading.
- Depending on the strategy, you have much more time for your hobbies, family, or travel. Since time is our most precious asset, this advantage weighs correspondingly heavily for most traders.
If we now directly compare the three most important pros and cons, we can demystify and at least mitigate the scaremongering:
1. Mental/psychological pitfalls and weaknesses
We suffer and are close to depression when things are not going well for us. We are on cloud nine when we are winning. We feel like manic depressives because one emotional state replaces the next. Constantly charged with adrenaline and dopamine. Is this how our lives should look like?
NO: Professional traders trade rationally and have little emotional fluctuations. They know that losses are part of the game and accept them as neutrally as they accept profits. They don't have sleepless nights. We are not gamblers in a casino chasing the thrill. Trading is a business and not for our excitement.
Of course, trading can be fun, but if we notice that it is burdening us, we should urgently change something about our trading style. In the beginning, it is naturally more exciting, as always in life. But later it becomes routine and the thrill subsides. Those who still experience emotional roller coasters later on should rethink their money management and strategy. Perhaps they are in the market with too much risk or on too small a timeframe. For example, someone who follows a swing strategy with daily or even weekly candles does not have the emotional stress that a trader may experience because they trade every small intraday movement.
2. Total Loss
Our hard-earned money goes up in flames and all that we have saved for so long simply disappears. No new car, no vacation, no weekend house. Just gone!
We tend to visualize our losses, just like we do with our goals. That's completely normal. When we suffer a loss, we imagine what we could have bought with that money. Since we can't avoid losses, we should learn to not see the loss as money, but maybe as points that are sometimes more and sometimes less. It's only when we actually cash out that it becomes a real value.
Regarding total loss: Suffering a total loss is bitter but very unlikely if you don't put everything on one card. If you trade with a robust system, you wouldn't go "all in" but only invest a few percent of your capital in a value. By additionally trading several values that don't correlate, you further minimize your risks through diversification. The probability of a total loss can be almost eliminated with a good systematic approach.
There is of course the creeping total loss. That means the money becomes smaller and smaller due to an endless drawdown. However, it is also true that the new investment only represents a percentage of the new capital. Thus, a total loss is only possible if the trading capital is already too low, if the smallest position size is already larger than what one could afford according to their money management.
Another total loss is possible if, for example, the broker goes bankrupt and you are not covered by deposit insurance or if something worse happens such as a currency reform / war, etc. But this risk is also borne by all non-traders.
Therefore, if we minimize the risks of a total loss through our systematics but multiply the profit expectations also through our systematics, the profit prospects outweigh the risks of a total loss by far.
3. Social Challenge
Traders don't enjoy the best reputation in society. Whether it's financial crises, famines, or the gap between rich and poor, traders seem to be, at least in the minds of people in Germany, the root of all evil. Those who come out as traders in their environment often face a lot of opposition. Regardless of whether they reveal their profits or losses, they receive negative feedback. With profits, it's often seen as luck, and with losses, it's "I told you so, this doesn't work in the long run."
However, the fact that traders as market makers are actually responsible for a functioning system is overlooked. Supply and demand are regulated by traders, and they provide liquidity in the markets. But that would be going too far and certainly not the real motivation of each individual trader.
Of course, we want to make a profit. Opposition and irrational criticism also do not come from other traders, but from people who have less knowledge about it. Often it is really well-meant. Perhaps they themselves have suffered losses and, out of inner conviction, consider it impossible for people to actually make money in the markets.
As always in life, we should listen to people who are already where we want to be. Be confident and trust your inner voice. The longer your system is right and successful, the easier it is to deal with criticism.
Like everything else, trading has its pros and cons. Where big profits can be made, there are also risks involved. If it were easy, everyone would be rich. Traders need a dose of courage and must be willing to step out of their comfort zone. However, if we cleverly integrate all known risks into our strategy and our risk and money management, we become more resilient against these negative factors. And as our mental strength grows through routine, experience, and self-confidence, we can enjoy the positive aspects much more.
If we can avoid trading emotionally, we have taken the most important step towards success. Trading should not be seen as a new game, but as a means to an end. More financial freedom, more time for family, and the opportunity to be more independent through a second source of income.
I hope this overview of the pros and cons has helped you in your decision-making. Now, I would be interested in hearing from you about any personal pros or cons that I may have missed, or any experiences you have already had. Please leave us a comment under this blog post.
I wish you a successful start in the stock market.