The secret to building wealth as a trader is simple: Don’t be greedy. It’s also easier said than done.
Greed is very difficult to overcome, because it’s hard to know exactly when to take a profit. You can stay with bullish trades for a very long time, so long as conditions remain favorable to the bulls. How many times have you had a nice gain on a trade, felt like you should (or are entitled to) an even bigger gain and suddenly lose it when the winds shift? My hand is up over here. It’s happened to me more times than I care to admit. (Read more about one of my biggest trading mistakes here.)
Making money and building wealth as a trader is a challenge each day. You are often faced with tough decisions, and no matter how long you’ve been trading, it can be hard to resist the siren call of greed.
Let’s say you make a great call on a Roku options play. The name recently sold off hard but rallied smartly on a nice earnings beat. You bought a call option prior to the earnings report and are sitting on a solid 30% winner. Maybe your goal was to make 50%. You talk yourself into holding it a little longer, keeping in mind that options decay until expiration. You hold on, and a few days later, a selloff ensues and you’re sporting a 20% loss.
Greed took over, and your portfolio suffered.
The secret to building wealth
On the flip side of greed you find discipline. Discipline allows you to keep growing your portfolio. Some traders say compounding is the way to go, but the market doesn’t spit out winning lottery tickets every day. In my experience, risk mitigation, discipline and structure are key.
As a trader, you need to have a solid system of taking profits when you have them. Most of all, be humble and respect the markets. Your job is to reduce risk, book gains and look for the next great trade idea. Rinse, wash and repeat.