Key Principles to Understand While Trading

Let’s start with a reality check: no course, no matter how comprehensive or engaging, can magically transform you into a great trader. You have to put in the work—day in and day out, often for longer than your motivation alone can sustain. Success in trading, as in life, is the product of deliberate practice, discipline, and a willingness to outlast the competition. In short, if you're looking for a shortcut, I suggest you try Monopoly—it’s faster and far less expensive. This also holds true for this course. Simply reading it once most likely won't do the trick. Truly study the words you are about to take in. Download them directly into your mind if possible. This course won't take weeks to read. The information is very dense. Use the time you save, by not having to read 300 pages, to revisit the 3 pages 100 times.

1. The Train Leaves the Station with the Least Passengers

Most people are not profitable. This means most people are wrong. If we follow this train of thought even further it means: If everyone is screaming for prices to move higher they most likely won't. It is simply not how markets work. Most people have to be wrong. This is good for us because we can use the common sentiment in a market place to gauge what might happen next. The commonly used phrase "when others are fearful, be greedy" holds true, but only when tempered by reason and preparation. Buying at the right time often means doing so when the crowd is running in the opposite direction.

2. Emotions Are the Enemy

FOMO and greed are the twin engines driving the market. Unfortunately, they are terrible copilots for your trading journey. Avoid letting these emotions steer your decisions; instead, anchor yourself in strategy and reason. We will look at this in more detail later.

3. Consistency is King

A single profitable trade does not make you a trader; it makes you lucky. The hallmark of a trader is consistent profitability over time. Mastery lies in the mundane—executing your strategy methodically, day after day.

4. Patience Pays

The market rewards those who wait. If you rush in to buy every opportunity you won't have any powder left when the big opportunities finally show themselves.

5. Master Yourself Before Mastering the Market

Understanding the market is critical, but understanding yourself is paramount. Your emotions, biases, and impulses are the real adversaries. Develop a trading journal to track your thoughts and decisions. Evaluate when you act rationally versus emotionally, and focus on building self-control and conviction in your strategy. Yes you need a strict plan and execute it. That is correct. But most aren’t able to. Because their own emotions are in the way. You need to study what your brain is telling you, what is rational and what is emotional, study what self control you need and study sticking to your plan and the conviction needed for that.

How Humans Think: The Emotional Elephant and the Rational Rider

Humans make decisions based primarily on emotions, only later justifying them with logic. Trading magnifies this tendency, especially with two primal emotions: fear and greed. Since these two are the most relevant we will focus on them.

Fear: The Flight Instinct

When faced with fear, we instinctively avoid perceived threats—an excellent survival strategy when confronting lions in the wild but disastrous in financial markets. Panic selling during a price drop, while emotionally satisfying, often derails well-constructed strategies. Remember, no sound trading plan includes, "Sell when I’m panicking."

Greed: The Insatiable Desire for More

Greed tempts traders to chase unrealistic gains, take on excessive leverage, or invest capital they can’t afford to lose. The mental gymnastics of calculating "what could be" often lead to irrational decisions. Once you mentally calculate how much more money you could make if you did x unrational increase in leverage or if the market would go to x unreasonable price target: you have already lost. 

Why Do Most Traders Lose Money?

Statistics paint a sobering picture: up to 95% of traders are unprofitable after accounting for fees. Even among those using technical analysis—an estimated 80%— fail. Why? Three primary reasons:

1. Flawed Analysis – Their strategies simply don’t work.
2. Correct Analysis, Wrong Conclusions – Misinterpretation of valid insights.
3. Correct Analysis, Correct Conclusions, Poor Execution – Emotional interference undermines their discipline.

Personal experience corroborates this. I’ve traded alongside peers with identical data, yet while I turned a profit, they incurred losses. Why? They overleveraged (greed), hesitated to sell (greed), sold prematurely out of fear, or deviated from their own plans. They sold because their brain made up some reason why price will go to 0 or bought because their brain made up some reason why prices will sky rocket. They didn't base their decisions on rational data. This underscores a vital truth: knowledge is essential, but emotional discipline determines profitability.

How is the Stock Market Driven?

In the following we will get into important parts of the market you may need to start trading with confidence. The stock market, in its simplest terms, operates on supply and demand. Boring theory, I know. But beneath this elementary explanation lies a nuanced ecosystem shaped by two main participants: retail traders and institutional investors. They are, as I find, more interesting.

• Retail Traders: Individuals trading their own capital. They often have fewer resources and rely heavily on publicly available tools and analysis (This is you).
• Institutional Investors: Entities managing vast sums of capital for others. Armed with superior resources and expertise, institutions often enter and exit markets more strategically than retail traders. However, their size can work against them; they struggle to exit positions quickly without impacting market prices (this could f.e. be your bank).

Smart Money vs. Retail Traders

Institutions, often termed "smart money," exploit retail traders (you) predictable emotional responses to market movements. Retail traders frequently act as "exit liquidity" for institutions, buying at inflated prices or selling at the bottom. This asymmetry highlights why the majority of individual traders fail to outperform the market. They are simply up against opposition who is executing their strategy ruthlessly. Banks don't FOMO. And because retail investors do they turn a profit.

The Role of Market Makers

Market makers ensure liquidity by constantly buying and selling assets, profiting from the bid-ask spread. In volatile markets, they thrive on rapid price swings, often benefiting from forced liquidations. Here’s how they operate:

• Volatility Profits: Liquidations amplify price movements, creating lucrative opportunities.
• Liquidity Provision: By facilitating trades during high-volume events, market makers earn consistent spreads.
• Arbitrage Opportunities: Discrepancies between exchanges allow them to capitalize on price inefficiencies.

An example tool: Heatmaps

The Heatmap is one example of a tool I like to use. Heatmaps, such as those provided by Coinglass or TradingLite, reveal zones of high liquidity where liquidations are likely. These tools can be invaluable for understanding market movements. What does this mean in simple words? They show where many people can be liquidated. Market makers can push prices. Market makers are interested in liquidating as many people as possible. Conlcusion: Prices tend to move to areas of high liquidity. This, of course, is just one example of a tool. Find tools you yourself find interesting and you can stick to. The Heatmap is one of those for me.

Key Takeaways:

1. Market makers thrive on volatility and liquidity.
2. Heatmaps reveal zones of interest.
3. Markets often move in the least expected direction, testing traders’ resilience.