Realistic expectations

1. Realistic Expectations in Trading and Investing

Realistic expectations are paramount to success – and, crucially, to *surviving* – in the world of trading and investing. Many beginners, and even some experienced participants, fall prey to unrealistic hopes fueled by sensationalized stories of overnight riches or misleading marketing. This article aims to provide a comprehensive understanding of what to realistically expect when entering financial markets, covering topics from profitability rates to risk management, psychological preparedness, and the time commitment required. We’ll focus on a long-term, sustainable approach, rather than chasing ‘get-rich-quick’ schemes. This article is geared towards beginners, assuming little to no prior knowledge.

The Myth of Consistent High Returns

The most significant source of unrealistic expectations stems from the belief that consistently high returns are achievable. The media often highlights exceptional gains made by a select few, creating a distorted perception of the average trader’s experience. The truth is, the vast majority of traders *lose* money, and even those who are profitable typically experience periods of drawdown (losses).

Consider these sobering statistics:

• **Retail Trader Failure Rate:** Studies consistently show that over 80-95% of day traders lose money. This is not due to a lack of intelligence, but rather a combination of factors, including unrealistic expectations, poor risk management, and a lack of disciplined strategy. [1]
• **Professional Performance:** Even professional fund managers, with access to superior resources and expertise, rarely consistently outperform the market over the long term. The S&P 500, a broad market index, often beats the average actively managed fund. [2]
• **Compounding and Realistic Growth:** A realistic annual return expectation for a diversified investment portfolio is typically between 7-10%, *before* accounting for inflation and taxes. Even this seemingly modest return, when compounded over decades, can lead to significant wealth accumulation. However, it requires patience and discipline. [3]

Chasing unrealistic returns often leads to taking excessive risks, using leverage inappropriately (see Leverage section below), and deviating from a well-defined trading plan. It’s far better to aim for consistent, moderate gains than to gamble on high-reward, high-risk ventures.

Understanding Risk and Reward

The relationship between risk and reward is fundamental to trading. Higher potential returns are *always* associated with higher risk. Expecting large profits without accepting the corresponding risk is a recipe for disaster.

• **Risk Tolerance:** Before you begin trading, honestly assess your risk tolerance. How much money are you willing to lose without it significantly impacting your financial well-being or emotional state? This is crucial for determining your position size and the types of instruments you trade. [4]
• **Risk Management:** Implementing a robust risk management strategy is essential. This includes setting stop-loss orders (see Stop-Loss Orders below), diversifying your portfolio (see Diversification below), and limiting the amount of capital you risk on any single trade. A common rule of thumb is to risk no more than 1-2% of your trading capital on any one trade.
• **Reward-to-Risk Ratio:** Evaluate your trades based on the potential reward relative to the risk. A favorable reward-to-risk ratio (e.g., 2:1 or 3:1) means that for every dollar you risk, you stand to gain two or three dollars. Avoid trades with a poor reward-to-risk ratio, even if the probability of success seems high.

The Time Commitment Required

Trading is not a passive income stream. It requires a significant time commitment, especially in the beginning.

• **Learning and Research:** Before risking any real money, dedicate time to learning about financial markets, trading strategies, and risk management techniques. This includes studying Technical Analysis, Fundamental Analysis, and different trading instruments (e.g., stocks, forex, cryptocurrencies). [5]
• **Market Monitoring:** You need to actively monitor the markets, even if you are not actively trading. Staying informed about economic news, political events, and company announcements is crucial for making informed decisions. [6]
• **Trade Execution and Analysis:** Identifying trading opportunities, executing trades, and analyzing your results takes time and effort. Keeping a trading journal (see Trading Journal below) is essential for identifying your strengths and weaknesses and improving your performance.
• **Continuous Learning:** Financial markets are constantly evolving. You need to continuously learn and adapt your strategies to stay ahead of the curve.

Don't underestimate the time commitment. Treat trading as a part-time job, especially when starting out.

Psychological Preparedness

Trading is as much a psychological game as it is a technical one. Emotions can cloud your judgment and lead to impulsive decisions.

• **Fear and Greed:** Fear of losing money can cause you to exit trades prematurely, while greed can lead you to hold onto winning trades for too long. Learn to control your emotions and stick to your trading plan. [7]
• **Discipline:** Discipline is essential for following your trading plan and avoiding impulsive decisions. Develop a set of rules and stick to them, even when you are tempted to deviate.
• **Patience:** Patience is crucial for waiting for the right trading opportunities and avoiding overtrading. Not every day is a trading day.
• **Accepting Losses:** Losses are an inevitable part of trading. Learn to accept them as a cost of doing business and avoid dwelling on them. Focus on learning from your mistakes and improving your strategy. Don't engage in "revenge trading" – trying to recoup losses by taking on more risk.

Understanding Different Trading Styles and Timeframes

Your expectations should also be aligned with your chosen trading style and timeframe.

• **Day Trading:** Involves opening and closing trades within the same day. Requires significant time commitment, discipline, and risk management skills. Expectation of small, consistent profits. [8]
• **Swing Trading:** Involves holding trades for several days or weeks to profit from short-term price swings. Requires less time commitment than day trading but still requires active monitoring. Expectation of moderate profits.
• **Position Trading:** Involves holding trades for several months or years to profit from long-term trends. Requires the least time commitment but also offers the least frequent trading opportunities. Expectation of larger, but less frequent, profits.
• **Scalping:** A very short-term strategy aiming for small profits from tiny price changes. Extremely risky and requires very fast execution. Expectation of very small profits per trade, relying on high volume.

Common Trading Mistakes and How to Avoid Them

Being aware of common mistakes can help you set more realistic expectations and avoid costly errors.

• **Chasing Losses:** Trying to recoup losses by taking on more risk. This often leads to even greater losses.
• **Overtrading:** Taking too many trades, often out of boredom or frustration. This increases your transaction costs and reduces your profitability.
• **Ignoring Risk Management:** Failing to set stop-loss orders or diversify your portfolio.
• **Following the Crowd:** Making trading decisions based on what others are doing, rather than on your own analysis.
• **Emotional Trading:** Letting your emotions influence your trading decisions.
• **Lack of a Trading Plan:** Trading without a clear strategy or set of rules.

The Role of Leverage

Leverage can amplify both your profits and your losses. While it can be a useful tool for experienced traders, it is extremely risky for beginners. Expecting to make large profits with high leverage is a dangerous illusion. Leverage should be used cautiously and only by those who fully understand the risks involved. [9]

Importance of a Trading Plan and Journal

A well-defined Trading Plan is your roadmap to success. It should outline your trading goals, risk tolerance, strategies, and rules. A Trading Journal is a record of your trades, including your entry and exit points, reasons for taking the trade, and your emotional state. Reviewing your trading journal can help you identify your strengths and weaknesses and improve your performance.

Key Indicators and Strategies to Learn (Beginner Level)

While a deep dive into all indicators is beyond this scope, here’s a starting point:

• **Moving Averages:** Used to identify trends. [10]
• **Relative Strength Index (RSI):** Used to identify overbought and oversold conditions. [11]
• **MACD (Moving Average Convergence Divergence):** A trend-following momentum indicator. [12]
• **Support and Resistance Levels:** Key price levels where the price is likely to find support or resistance. [13]
• **Trend Lines:** Used to identify the direction of the trend.
• **Fibonacci Retracements:** Used to identify potential support and resistance levels. [14]
• **Breakout Strategies:** Trading based on price breaking through key levels.
• **Reversal Strategies:** Trading based on identifying potential trend reversals.
• **Candlestick Patterns:** Visual patterns that can provide clues about future price movements. [15]
• **Bollinger Bands:** Volatility indicator. [16]
• **Ichimoku Cloud:** A comprehensive indicator providing support, resistance, trend and momentum. [17]
• **Volume Weighted Average Price (VWAP):** Measures the average price a security has traded at throughout the day, based on both price and volume. [18]
• **Average True Range (ATR):** Measures market volatility. [19]
• **Donchian Channels:** Identifies breakouts and trends. [20]
• **Parabolic SAR:** A trend-following indicator. [21]
• **Elliott Wave Theory:** A more complex theory identifying patterns in price waves. [22]
• **Gann Theory:** Another complex theory utilizing geometric angles and patterns. [23]
• **Harmonic Patterns:** Predictive patterns based on Fibonacci ratios. [24]
• **Point and Figure Charting:** A charting method focusing on price movements rather than time. [25]
• **Renko Charting:** A charting method filtering out minor price fluctuations. [26]
• **Keltner Channels:** Volatility indicator similar to Bollinger Bands. [27]
• **Heiken Ashi:** A modified candlestick chart highlighting trends. [28]
• **Chaikin Money Flow:** Measures buying and selling pressure. [29]

Conclusion

Success in trading and investing requires realistic expectations, discipline, and a commitment to continuous learning. Avoid the allure of ‘get-rich-quick’ schemes and focus on building a sustainable strategy based on sound risk management and a thorough understanding of financial markets. Remember that losses are inevitable, and the key is to learn from your mistakes and avoid repeating them. Patience, discipline, and a long-term perspective are your greatest allies.

Risk Management Technical Analysis Fundamental Analysis Trading Plan Trading Journal Stop-Loss Orders Diversification Leverage Candlestick Patterns Market Sentiment

Start Trading Now

Sign up at IQ Option (Minimum deposit $10) Open an account at Pocket Option (Minimum deposit $5)

Join Our Community

Subscribe to our Telegram channel @strategybin to receive: ✓ Daily trading signals ✓ Exclusive strategy analysis ✓ Market trend alerts ✓ Educational materials for beginners