AndyN

@andyn_EAG

Trading: Earning an income or building wealth?

Shattering those dreams and building new ones

During your research, or just random browsing the articles put up by your google search about trading bitcoin, have you ever come across statements like this:

- How to buy your own Lambo by day trading bitcoin

- Make a living from anywhere in the world by trading

- Follow “X” golden rule and trade yourself to incredible riches

- …

Well, I have, far too many.

I’ve even come across statements of people saying:

“I just quit my job today, looking forward to trading full-time.”

Reading comments, clickbait titles and ads like that gives me the shivers, because they target gullible people with only one goal, to take their money as fast as possible.

They all promise the world to people, the opportunity to live your dream and tell you, that it’s easy to get there.

“Anyone who wants to sell you overnight success or wealth is not interested in your success; they are interested in your money.” — Bo Bennett

We at Edge Analysis Group have another view on this, we do believe that trading holds the possibility to enhance your life, but it’s not easy, there’s no golden rule, and there is no safe way to accomplish your dreams.

Typically, at this point in the article, I would briefly warn you about the dangers of trading and how you should not trade with money you cannot afford to lose , but I’m going to go deeper into that further on in the article.

Trading: a dream job?

Most YouTube video’s or popular bloggers will portray trading as a smooth, comfortable, quick way, for anyone, even with a shoestring budget to make millions.

The only thing you need to do is follow a set of rules and read something like: “how I made a million bucks in 30 seconds with only a penny”.

If you don’t believe me, type in “how to get rich trading” on YouTube and see for yourself.

Well, to bust in an open door, there’s no easy way to getting rich, and those videos are the way these people make money. Those who do portray it like that, don’t get their income out of trading, but out of selling you a dream.

However promising, I urge not to buy into the dream of quitting your day job and sit on a beach trading full time. Trading as a profession is a very demanding occupation, both physical and emotional, it may be the exhausting thing you’ll ever do, and unless you are trading for commissions or a paycheck, it’s not a convenient way to earn an income.

“If you don’t work very hard, it is extremely unlikely that you will be a good trader” — Bruce Kovner.

Earning an income VS building wealth

For most people, there is no difference between making an income and building wealth, even worse, just as I did, they see earning a salary as the only way to building wealth.

That’s also why some people quit their day jobs to become a full-time trader, so they can be the ones who are the protagonist of a get rich story.

Well, I’m going to say that earning an income and building wealth are two very different things.

Earning an income is keeping the lights on. Everyone needs a minimum amount of money each month to get all the bills paid and to cover all living expenses.

Therefore you need a consistent way of getting money each month, this can be by getting a job, being self-employed or starting a business, but you need a source of steady income.

I can already hear some of you thinking: “well trading is a job, so what are you getting at?..”

Well yes, trading is a job, when you trade for an investment bank, hedge fund, as an independent trader, etc.

When you are trading like that, you are either trading for a paycheck by your employer or trading for management fees or profit percentages with other people’s money, but you are not trading your own money for an income.

Let’s clarify it with a small example:

Say you have an honest starting account of $10,000 and you live like a hermit and only need $1,000 a month to get all the bills paid.
To get that amount every month, you would need to consistently make 10%, without a fault, to keep your trading account level.
If you want to enlarge your trading account, the % goes up.
What do you think your chances are to get that percentage of profit every month?

Then factor in that you are likely just starting to trade and still have to make every mistake in the book.

So if you are reading this and you were planning to switch jobs and are looking to start as a trader with a big firm, or you want to go independent, well then sorry to burst your bubble, but if you don’t have the job already, chances are you never will.

The trade of independent trader is highly regulated and the requirements for a job as a trader, are so high, that if you haven’t started out with that career in mind, you will probably never make it.

So, if trading is not a viable job option, then what’s it good for?

Well, it’s excellent for building wealth

As stated, building wealth is something entirely different than earning an income, it’s building up your assets.

While this might seem logical, most of us make the following mistakes:

1. Not seeing money as an asset.

Before going deeper into building wealth, I think it’s best to go back to the origins of money and to precisely define what money is.

Money, in whatever shape or form, has been invented to solve the problem of the coincidence of wants.

Before the existence of a medium of exchange, people had to rely on a barter system, bartering goods or services for other goods or services.

While this might seem by some as a better system than the current financial system, it posed a big problem, because you might not get in return those goods or services that you need or want, or maybe you want those goods or services, but you want them in the future.

Let’s explain this with an example, say a wheat farmer has a good harvest and goes to sell his produce on the market. If there isn’t a standard medium of exchange, the farmer would need to barter all of his goods for other goods, that he then would need to store, to trade them in the future against the products he actually wants.

There’s no guarantee for the farmer that he will be able to get to goods and services he wants in the future, by paying with the products he received for his crops.

That’s why money was invented; it is a means of exchange of value on which everyone agrees upon an exact amount of value for the said currency.

So by definition, money is nothing more than a means to convert labor, goods or services, produced or delivered now, into a form of agreed upon token/store of value, which you can later on exchange for other products or services.

This definition turns money into an asset, a means of conducting trade between different parties.

So as stated above, gathering wealth means building up your assets, so if money is an asset, owning more of it is building up wealth. But where people tend to go wrong is, they stockpile these assets in a savings account, letting them pile up in case they need them in the future.

While it would seem like a sensible thing to do, it’s one of the worst things you can do, when your goal is to build wealth.

Thanks to rising inflation, the money we stockpile in savings accounts get depreciated year after year, so the amount of work we had to put in to amass the money, gets worth less and less.

So instead of letting your money sit there, it’s better to put those hard-earned Dollars to work, and there are various ways to do that*:

- Investing in the financial markets

- Investing in real estate

- Trading the financial markets

- Giving out loans and getting percentages on it

- ….

The list doesn’t end there and not every option is a good option for everyone, but the good news is, there will always be a way that is suited for you.

For us at Edge Analysis Group, we feel that trading the financial markets is the way to go and we set out to assist each other and everyone who’s interested in trading, to find their edge.

*I do want to give this quick word of warning, never put all your savings into investments. Make sure that you have enough set-aside, that if something unforeseen happens, you still have enough liquidity available.

2. Mixing up assets and liabilities.

A lot of people think that owning a house that they’ve paid for with a mortgage is an asset, and also their car, which they have paid for with a loan and that TV bought with a credit card, ….

Are those items really assets if you are monthly paying an amount to keep them?

Well unless you are not a human being, the answer, unfortunately, is NO. As long as you have to keep paying off a loan for it, it is not an asset.

This is the biggest and most common mistake made and it just utterly kills your ability to build wealth. It might give you a good feeling having all these things at your disposal, but for every one luxury you pay with a loan, it’s the lender who’s building wealth, and you are providing.

“If you buy things you do not need, soon you will have to sell things you need.” — Warren Buffett

So if putting your money to work seems a daunting task, this one might be a bit easier, don’t buy things you cannot pay for up front. Paying off a loan is giving the lender a fixed paycheck over time.

3. Trading money you cannot afford to lose.

Though we at Edge Analysis Group believe trading the financial markets is an excellent way to build wealth, and we make it our goal to help everyone who’s interested to find their edge. We do advocate the following words of warning: Never trade with money you cannot afford to lose.

It might sound like a simple warning, but it’s far from it. Although great opportunities for building wealth appear almost every day, so do chances to lose money.

The financial markets are by definition a zero-sum game, it’s a trading market like any other, and there are always two parties for each trade. So if one is making money, it’s because the other one paid it.

That being said, the financial markets obviously don’t only have players losing money, there have been enormously successful people, who made staggering amounts of money and who are now counted among the most wealthy people in the world, with Warren Buffett and Ed Seykota being some of the most widely known examples.

“Risk no more than you can afford to lose, and also risk enough so that a win is meaningful” — Ed Seykota

Guidelines for building wealth

As a summary, there are no fixed rules you can follow to get rich quick, but there are guidelines to improve your financial situation and start you on the road to building wealth:

1. Make sure you have a steady income to pay all the monthly expenses

2. Put your money to work

3. Do not pay for goods or services with loans

4. Do not trade with money you cannot afford to lose

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