Trading is so lucrative precisely because most people lose money at it.
After all, the more money the losers lose, the more money the winners make.
But hang on… why do the losing traders lose so much in the first place?
Think about it for a moment.
Ready for the answer?
Here it is…
Most traders think they’re OK at trading, when they’re actually bad at it.
Allow me to explain.
Why There’s No Money In Chess
Let’s assume you know nothing about chess, but suddenly developed an interest in it.
You go to the library and pick up a couple of books on the subject, and maybe register for a weekend beginners workshop.
You then spend the next few weeks practicing and start getting the hang of it.
The following month, you register for the World Chess Championship.
- How much money would you bet on yourself reaching the top 10?
- What’s the chance of you reaching the top 10?
For both questions, I hope, you answered “zero”.
Most Amateurs Know They Suck
You wouldn’t bet on yourself because you know you don’t stand a chance against the professionals.
That’s why there’s no money to be made in chess. The amateurs know they’re bad at it, so they don’t bet on themselves winning.
The same goes for almost all competitive arenas. Golf, tennis, poker, even e-sports. Everyone knows that the chances of an amateur winning at such competitions is zero percent. Not ten percent, not five percent.
In almost all skill-based competitions, it’s practically impossible for amateurs to win due to luck.
But Not In Trading
At any given moment, a significant percentage of traders will be sitting on a paper profit, regardless of how skilled or experienced they are.
Consider Larry the beginner trader, who reads a few books and attends a Forex trading seminar.
He fires up his trading platform and immediately takes a few trades on his newly opened $1,000 account. Within an hour, he’s up $300.
To Larry, he has suddenly become a genius who will soon become very wealthy.
In reality though, this $300 profit is the bait that will lead him to lose his entire account in the coming days.
Fooled By Randomness
Every day, thousands of Larrys are trading this way. They think that making money on a few trades means that they are on the right track.
What they don’t realize, as Nassim Taleb puts it, is that they have mistaken luck for skills.
In chess, golf or tennis, there’s no way an amateur can win a tournament by luck.
But in trading, an amateur can make a lot of money quickly simply because he coincidentally clicked the right button at the right time.
That’s what draws people into throwing their money into the market time and time again – they think they know what they’re doing.
And so my friends, that’s why there’s so much money to be made in trading.