Trading stocks can relate to many things in life, but my favorite comparison to trading is car maintenance.
1. Cars have different styles of driving vs. Trading has different types of traders
2. Cars can make you money and lose you money vs. Stocks can make you money and lose you money
3. Cars require a lot of maintenance and planning vs. Trading requires a lot of planning and adjusting
4. Cars need different tires depending on the season and weather vs. Trading styles vary during different seasons and slow months
5. Cars require discipline vs. Trading requires discipline
I am going to walk you through each of those steps I listed above and explain why trading can relate to something that has nothing to do with the markets and stocks.
- When it comes to driving cars there are many ways one can drive: fast and furious or slow and steady. To figure out which kind of driver you are depends on your personality and patience. Do you want to get somewhere super fastand catch the thrill or do you want to take your time and eventually get there? This can be said the same way about what kind of trader you are. There are momentum and day traders and then there are swing traders and long-term investors. Again, this depends on your personality and patience. Do you want to get in and out of your positions within seconds or minutes grasping that adrenaline rush, or do you want to get in a stock and just hold it for days or weeks taking your time and not worrying about how long it takes to get to point B.
- There are different kind of car owners, ones that buy super nice cars and hold them in mint condition until their value goes up or people who buy a car and run it to the ground just trying to get from point A to Point B. The owners who buy it for the future value will expect a greater return, the owners who just want the car for the transportation will end up with a depreciation in future value and it will end up costing them money down the road with maintenance and miles. This is the same with traders, a trader can do all of the fundamental research and technical research in a company to better gauge their future value and trade it expectinga greater return or a trader can skip the fundamentals and research and try to rush the process and decide how they can make money right now for quick and easy money trading random stocks.
- Cars require a ton of maintenance and planning in order fora smooth and cheaper ride. There is a reason a car needs its oil changed every so milesand its tires rotated and its filters changed. That’s because if you don’t take care of the car and stick to a specific plan and schedule than you will have more problems down the road than just a few small repairs, your whole engine or block can blow up and crack. This is the same with trading. A trader needs a plan and a course of action. They need to define what type of trader they are and how they want to trade. If a trader wants to get in a stock looking for a 5% gain with a 2% stop loss then that’s what their plan is. If it hits the target get out. If it hits the stop loss get out. But the problem is, and this is the main reason why 90% of traders fail, is that they hold and hope and don’t stick to their plan. The stock might hit their stop loss but they won’t listen to it because they still believe in the stock and thinks it has to go up eventually. The stock could even hit their target but they want more out of it and are getting greedy, the stock could tank and blow by your stop loss and you could lose more money than anticipated. If a trader doesn’t follow his/her plan, then they will blow their account up and end up with $0 left, it’s as simple as that.
- The car’s performance on the road depends a lot on which tire you use in different seasons and inclement weather. For winter, you can’t have summer tires on because if it snows your car will spin and won’t go anywhere. So you will need to put on winter tires for the winter. As winter turns into spring and summer, you will want to transition into your summer or all-season tires for better performance and a smoother ride. For trading, you need to adapt to the volatility of the market instead of the change in weather or seasons. During the summer months, trading tends to be more volatile and you will see faster and larger trades because there are more traders involved in the summer. As you transition into winter and the holiday you will need to adjust how you trade because more traders are taking a break with their family and some traders that were more active in the summer are either at school or at their other jobs. You won’t see as many momentum plays and day trading opportunities. You will have to be more patient and scalp a few cents here and there rather than expect the stock to run 100%+ like some do in the summer.
- Lastly, I will talk about how discipline is needed for both cars and trading. When you are an owner of a car you need to realize that there are certain steps that must be taken on time or else the car will fail on you. I am referencing number 3 again but talking more about the discipline of it, not the actual plan. If you aren’t disciplined and stay on track with your oil changes and such there could be huge consequences and you might have to get a new car sooner than you anticipated. This is all mental and if you don’t tell yourself that this is a priority, then your next priority could be buying a new car. As a trader, discipline, next to a trading plan, is one of the biggest reasons only 10% of traders succeed. Not many traders can understand the psychology of trading. If you don’t stick to a trading plan and manage your winners and losers appropriately, then you are in for a rude awakening and a zero dollar account balance and you will be a part of the 90% who fail. What sets the 10% apart from the 90% are their discipline and trading plan. What sets good car owners from bad car owners is their discipline and sticking to the maintenance schedule.
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