Last week, in response to my invitation to submit market sayings, one anonymous commentator who identified himself as one who had spent 16 years on the floor of the NYSE suggested a saying he attributed to folks who worked there. The saying is: "Traders die broke." Of course, I've heard the saying before as well as its companion: "Traders drive Fords, investors drive Cadillacs." Since I am a trader, and since I have a book out entitled "Trade Your Way to Wealth," the saying is of definite interest.

Incidentally, I DO have a Ford (along with 4 other vehicles and 5 homes) so I am speculating on how it will come about that I will die broke because I am a trader. First, I should note that trading does involve risk and the trader who trades as a gambler is, I agree, quite likely to die broke. Trading, however, can be done with limited, measured, or, at times, even no risk depending upon the strategy utilized. Since I have long been concerned with people who trade with little or no awareness to the real risks they are undertaking, I wrote "Trade Your Way to Wealth: Earn Big Profits with No Risk, Low Risk, and Measured Risk Strategies." I also write these Newsletter articles with the hope that readers will incorporate things like business plans, money management, exit strategies, and risk awareness and control into their own investing and trading.

In general, it is probably fair to say that the lower the risk, the lower the potential reward. A trader who uses no risk or very low risk collars, for example, may not make as much as fast as someone who chooses a very high risk strategy like simply buying a stock with no exit for example. However, the high risk trader stands a greater risk of dying broke than the risk aware or risk controlled trader. A trader can take wild swings hoping to hit the home run (that seems to be what most do) or he can use an approach with a lesser measured risk and attempt to generate wealth in a safer manner. Personally, I chose the latter. Success comes in trading the market much like the way one would eat an elephant, one bite at a time. The wild swinging trader may, indeed, hit the home run, but in my experience coaching and speaking with traders, it is the wild swinger who is most likely to go broke. Even if they do connect for the home run, they seem to take yet another wild swing with the proceeds of the first success and let it go down the drain.

It is important to understand who we are listening to. When someone who worked the floor of the NYSE (assuming not as a janitor) says "traders die broke," who is this person? Is it the broker who recommended you hold Enron to the bitter end? Is it the person who was urging you to continue to buy tech stocks coming into the 2000 crash, or is it one of the brilliant minds at one of the big firms that recently have had to write off billions of dollars because of the stupidity of their investments in the sub-prime markets?

When did the saying arise? Was it at a time when a trader had no chance to make a buck on a spread because commissions were so outrageous, or was it in more recent times when commissions were much more manageable? After all, it would be awfully difficult making any money writing covered calls if you had to pay a $200 commission on a single contract. Today, it can be done with a $5, $10, or $15 commission, giving the trader at least a better chance.

Finally, I do agree that traders may die broke if they trade like gamblers, do not discipline their trades or do not know how to discipline them; if they fail to incorporate principles of sound money management, or fail to enter positions with an exit strategy. On the other hand, I believe traders who apply discipline, money and risk management, and don't constantly swing for the fences do have a decent chance of doing well provided they expend the effort to educate themselves -- at least as a trader who has done those things successfully so far, I hope so.

You can comment on this article on my blog!

Good Trading!

Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader

"Trade Your Way to Wealth" by Bill Kraft is an Amazon.com best seller!

Mr. Kraft's past articles are posted on our website for your review.

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