Since i am waiting for my turn to play mahjong, i might as well write something here.. i haven wrote anything on investing and trading so here goes.. not going to go into the details here... just give u guys an idea first...
Firstly, why are there so many ppl that are apprehensive about investing/trading? Most of us would have heard of how some relatives that have burnt themselves badly in the market, wont the same happen to me? Well, simply put, people that have burnt themselves werent really investing/trading. They are gambling or in technical terms using excessive leverage without hedging. Trading (uses charting methods) are usually used for short term investing (sometimes holding shares for less than an hour or even minutes). Trading is the closest to gambling in the financial markets (besides buying shares blindly and lying to yourself that you are a long term investor). However how safe do u think your money is sitting in the bank? Inflation is running at about 3% currently and is highly likely that it will hit 4-5% come next year, you are losing that % yearly without doing anything. Are you happy with negative returns? If you say yes, is it because there is a greater chance of higher amt of losses that could you might attain if you enter the market? While, lets change the scenario a little, now lets say go for a job interview and the company tells you that they will cut your pay 3-5% yearly, would you wanna join that company? I think the answer is no, $3K will become $2.73k in just 3 short years.. your real purchasing power will drop if you do not invest.. what i really like to do here is that i hope i could chance your current perceptions on investing and get your started.. i have influenced quite a number of my friends already and hope to do the same here..
In gambling, gamblers uses a strategy call the Martingale Strategy, i guess you all would have heard about this before. Let me give you a scenario, say you bet $50 in a casino and you loses it. What would your next bet be? It will be higher am i right? Say you bet 100 bucks and you lose again, how much would you bet now? You will increase the amount again right? This is the Martingale Strategy, it only works if you have an infinite amount of money which all of us dont have. This strategy drains your resources really fast, say you start with $5,000 and you bet $100 which you loses, you end up with 98% of your initial capital. Say this cycle repeats for 5 times and you double the bet after each game and you loses all 5 of them, you will now have only 38% of your initial capital left. Now for your next bet you will need about 263% profit to gain back your initial amount. (The % profit that you'll need to regain your initial capital increases as your losses accumulates). To gain that type of % profit, one has to take a whole lot more risk, which thus increases your odds of losing as well as the % profit that you need to obtain in your next bet to regain the $5K. You see the picture now? it's a viscious cycle.. Also, gambling is a zero-sum game, the money is just changing hands and there is no net gain for the group as a whole. However, investing and trading is not... althought there are the buy and sell side for each trade, it is not a zero-sum game and the group as a whole can and usually profit from the gamblers whom think that they are 'real-traders' when in fact they are not.
The factors above explains the humongous losses that are sustained by the gamblers' group. (Although there are other factors i.e. contra , emotions et cetera that plays a part lets not go there to simplify the issue). For real traders, they have a trading system in place which tells them when to enter the market and when to get out. You see for traders, real traders, they uses the Anit-Martingale strategy and that teaches them how to cut their losses. Lets go back to the example again, say you start trading with $5000, and you loses $100 and you cut your losses and sell your shares. Isnt it so much easier to gain back that $100 with the amount that you have left ($4900)? You would only need about 2% profit to make it back up to $5k (Singapore Government Treasury Bills pays about 2.1% currently). Say you are forced to cut your losses 8 times for $100 each, you will need now 19% to regain your initial capital and that is still so much lesser than the % profit required in the previous scenario. In trading the key is not how many times you are right, but how much you make when you are right and how little you loses when you are wrong. This is call stop-loss, and it is the one thing that'll prevents you from having to take excessive risk in your next trade to regain your capital or even profit from.
Trading is not easy though, i will go into detail next time on things like buy-sell signals, stop loss signals, moving stop loss signals, technical investing, probability, system back testing.. psychology plays a rather significant role too but i cant say much about that...
"Say i am holding a cup in my hand how much would you offer? Now, if you are holding that same cup in your hand, how much would you offer it to me now? " Think about it, it has got to do with the psychology of money...
Lastly, if you have little no qualms about putting over $200k to $500k on an apartment or flat, why are you afraid to even buy $1k worth of shares of say Coca-Cola, or MacDonalds? They have assets worth billions the world over. Which is safer? Note that your apartment's value do flucatuate too. Think about this as well...
