The Hidden Danger Every Income Trader Faces

This week on Talking Wealth, Janine uncovers the hidden dangers of income trading and explains why knowing when to adapt your strategy is critical as market conditions change. Whether your goal is to generate extra income or build long-term financial freedom, one of the biggest risks isn't the market itself. It's continuing to use the same strategy when the conditions that made it successful have changed.

• 0:01Speaker 00

  This podcast is brought to you by Wealth Within, a global leader in stock market education. For more information on our courses, head over to wealthwithin.com.au. Please note that the information in this podcast should not be considered personal financial advice. Enjoy.

• 0:19Speaker 01

  Hello and welcome to Talking Wealth. I'm Janine Cox, Senior Analyst at Wealth Within. Now, the hidden dangers every income trader faces, that's what I really like to share with you today. What if I told you that the biggest threat to your trading isn't picking the wrong stock, it's buying at the wrong time? Now, the Trump scenario was a really interesting one with Trump's tariffs being announced. Who could have envisaged that the market would unfold exactly as it had? That's not really the point. It's also risk management as well plays another big part. So it's not the market itself, it's

• 1:02Speaker 01

  something far more dangerous because most traders never see it coming. In fact, if you're one of the thousands of Australians trying to make a little extra money each week, and I've spoken to many who do this, whether that's a few hundred dollars on the side from the stock market, maybe you're trying to build a second income. I speak to lots of tradies who actually are doing this. And I know that you talk about it at work. You tell me, some of the people I talk to tell me they do. One day, ideally, you'd like to be able to replace your salary, but or maybe you haven't even thought about it that way, and you're more just thinking about having a punt. This is something that's

• 1:44Speaker 01

  really important for you because there's a hidden danger that could already be affecting you. The problem isn't that markets change. Markets have always moved through periods of growth, correction and decline, and that's completely normal. We talk about that on our show all the time and show you how the markets move from more of a growth or expansive phase into a corrective phase. The real danger is actually when you find something that you think works, and then you continue to trade exactly the same way, even after the market has started to change. As you go along, you'll see small changes in the market

• 2:27Speaker 01

  because you may be looking at really short timeframes, and you've been encouraged to do that because that makes you transact more. That makes the brokers out there more money. So it's about stepping back, looking at what's really going on. And at the end of the day, you want to be the one that's walking away with a pile of cash, not your broker. Now, many traders experience success during rising markets, that's what happens, and begin to believe that they've found the perfect strategy. And I've worked with many over the years, some who have actually developed systems with programs that are just pulling money out of the market. But eventually, it stops and it starts taking their money

• 3:12Speaker 01

  and turns the other way. Then they've got to scramble to try to come up with something, not understanding really how markets move and what they're doing. So it becomes a massive challenge. And you don't want to be doing that in a situation when the market does actually change, because there are times when you'll be able to make a lot of money out of the market if you're not coming from the back foot and you're really well prepared. So markets evolve, conditions change, and the market will perform differently. Sometimes it will, it will perform exceptionally well, and then quietly stop working at another time. Now, unfortunately, many traders don't recognise it. And being, if you're inexperienced,

• 3:55Speaker 01

  now, when I say inexperienced, I'm talking about inexperienced with very little knowledge, even if you've traded for a few years, that doesn't mean you've got a high level of knowledge. You could have a high level of experience going in and out of the market, trading short term. It doesn't mean you've got a lot of knowledge on the market. So there are a number of different things, knowledge, skills, psychology, and experience. Now, you want to be able to maintain a good level of knowledge, skill, experience, and you want your psychology to remain high at a high level. And how do you do that? You need all of those factors to be in balance. Now, the problem is many traders don't recognise this until they've

• 4:38Speaker 01

  experienced a series of unnecessary losses. And they assume that the next trade, trade's actually going to pull them back on track. How many times have you experienced that in the market? You've put a short term trade on, maybe you've followed some strategy that someone's told you online that you've got for free, and remember where free will get you. And then you go and put that into practice, and all of a sudden, it stops working and you start giving the money back to the market. And then you're trying to learn again. That's really being on the back foot. Now, you're going to assume that the next trade will pull you back in. This is where the gambling mentality comes in, and is why a lot of people

• 5:20Speaker 01

  lose ultimately on the market. And when the market really does change and move into a declining market, you won't even see it happen. You won't see it coming because you won't be looking at the right things. You'll be too busy chasing it. So it's, in reality, it's your strategy, not the market that needs to change. So how do you know when you're trading for income, whether your strategy is still the right strategy for today's market before it's too late? Well, we're going to uncover one of the biggest hidden dangers facing traders, and why so many people mistake a rising market for trading school. And

• 6:03Speaker 01

  we're going to look at five practical ways to recognise when your strategy needs to evolve. Because I want you to be able to continue building that income while you're protecting your capital. And that's the most important thing here. And this is what makes your income building strategy possible, and moves you from being someone who thinks, I'm just going to take a little bit of money out of the market because it's a, it's a bit of a hack. It's a bit of a, you know, pocket money exercise, bit of a game, rather than being serious about it and potentially being able to move into making this the biggest part of your income. Imagine if it overtook what you're actually making from your full

• 6:47Speaker 01

  time job, and you're only putting in, you know, maybe 20 minutes a day, something like that. Wouldn't that be amazing to be able to do? So imagine what that would do for, or what you could do with it, with the rest of that time. So if you come back and think about this for a minute, trading for income isn't about dividends, first of all. I think you know that by now, you've heard us talking about that, although some people are still fixed in that thinking. So people hear the word income investing, and they often think about dividends, paying, you know, by buying some shares, dollar cost averaging to continue

• 7:28Speaker 01

  to build that, and then getting the dividends off the, off those shares, which is fine if the market's trending up. And it has been over the longer term since the GFC. But what about what happens when the market corrects? It actually levels out a lot of the gains from the prior decade. So that would pretty much bring people back to square one, where they started. We don't want you to be there, or even into the red. And that's definitely where you don't want to be. So that's, this is one type of income. And it's probably considered to be the lowest risk income. But I actually think it builds a false sense of reality in that if you rely on those dividends, and if you've bought

• 8:13Speaker 01

  shares after a crunch, that's great. You've got not only a higher yield potentially, and those dividends will continue to, you know, support you over time. But if you're coming in later in that, in the cycle, this is not the way to be thinking. And this is what we've, we've got right now. This is the situation that's happening right now. We're going to see a massive shift in wealth over the next few years, unfortunately. And it will be from those people who have little or no knowledge, people who think that they're trading well, to those who actually have the knowledge and are in the know, and able to capitalise on that and make the most of it. But obviously, this is only one type

• 8:57Speaker 01

  of income, the dividends. And there are thousands of Australians, young professionals, parents, people, looking at their retirement decades down the track, and even retirees who are already there, who were using the stock market to generate that additional income.

• 9:17Speaker 01

  Our market is not a safe place. It was probably safer before our market was opened up, as I've explained before, I've talked about it on the show, I've talked about it in my podcasts. Our market is now a much bigger ocean, if that makes sense. So before we were like, I guess it was the bay in Victoria, which is not always a clean place to be. That's a whole different subject. It was, it's more about, and I don't know if you've ever swam in there, but it was more about, you know, this is, this was our little universe. Now, they tried to break it open at one stage and make the Australian market move over

• 9:57Speaker 01

  into the Singapore market and combine both, both markets. But there were too many factions against that happening. And one of those important things is that our, our super is invested, there's a lot of superannuation money that's invested in the Australian market. So that's a good thing. And, but the, the concerning thing is that when our market was opened up more to international players, it became more dangerous from the point of view of people who are holding that strategy of income from dividends, because the next crunch could be much more violent, much more protracted potentially, even though AI could

• 10:40Speaker 01

  help it recover. That's an unknown factor. We still don't know how long that, that next pullback could be. But at this point, it looks like it could last for at least a couple of years, the next major one. So heading into the next decade. So, and we're on the precipice of that. It could be that we see in, you know, the top over the next 18 months, could be the next 12 months where we see the top come in. And this is why you need to be preparing for this. So if you have a dividend strategy, and you're holding on to your dividends, and you're very, and you're protecting those and justifying why you

• 11:22Speaker 01

  would hold stocks that are falling significantly, then this is a real time for a rethink.

• 11:29Speaker 02

  Hey podcasters, are you looking for a practical and easy way to profit consistently from the stock market so you take control of your investments? Get Dale's bestselling book, How to Beat the Managed Funds by 20% for free, just pay shipping. It's packed with powerful, simple strategies that will give you the confidence and know-how to beat the managed funds by 20%. Visit the shop on the Wealth Within website and secure your copy today.

• 11:56Speaker 01

  So aside from the dividends part of it, some are looking to make an extra few hundred dollars a week. And I've talked to you, some of you are just ordinary people, mums and dads, young people who are doing this as well, wanting to make some extra money out of it. Seeing, you've seen videos online or YouTube videos online about this and think, yep, I want to do that as well. Some people want to replace part of their salary. I'm mentoring people who are pulling back and with working on their very own personal strategy that they're creating to help them get the outcome that they're after.

• 12:37Speaker 01

  They're putting it all together and it's an amazing thing to watch and see happen. Some simply want financial freedom and that's a big one for a lot of people. And there's quite a few, even ladies out there who are trading short term and looking at this differently. So this is a real shift that's coming and that only comes through knowledge and skill. And it's about tuning that mentality of short-term intraday or daily trading into a number of weeks or month, a couple of months, to get the most out of it. Rather than taking a small clip, you're missing out on what the real potential is.

• 13:22Speaker 01

  I mean, how many times have you potentially taken a trade, sorry about that, how many times have you taken a trade and only to watch, and you've closed it out, only to watch the share price rocket up? Doesn't that make you ask the question, am I really getting out of this what I could be? Now, if you're trading short-term using daily or intraday charts and believing that you can consistently pull money from the market, this is really what you need to be paying attention to. There's nothing wrong with that goal. I'm not going to knock what you're doing, although Dale might. But in fact, developing another income stream can be one of the smartest financial decisions

• 14:07Speaker 01

  that you make. So I take my hat off to you, what you're doing. So it's not trading for income that's the danger, it's just believing that your strategy will continue working regardless of what the market is doing. And how prepared are you to be able to change it and to know what to do? Are you going to go scrambling, looking for something else if it's not working? Or just wait, hoping that it's going to correct itself when conditions change? Now, your success could actually become your trap. Most traders begin during a healthy bull market. The market explodes with the number of people getting involved in it when that happens. Look at what was going on when Bitcoin took off and all the cryptos were accelerating.

• 14:51Speaker 01

  The number of people trading just expanded parabolically, significantly. So the market rises, trades work, confidence grows, people talk about how well they're doing and before long, it's easy to think that you found the perfect strategy. But here's the question. So did your income strategy actually make you money? Did it stop working? You know, there's a huge difference here. So was it the market or was it your strategy that was working? Many strategies, income strategies will perform while markets are trending higher.

• 15:36Speaker 01

  So we see these rises and it could be somewhere between four weeks and eight weeks where the stock rises and then it pulls back. Maybe it pulls back for one to three or four weeks and then it takes off again and then it pulls back again. Maybe it's less in terms of the number of weeks it pulls back from there and then moves up again. And it could move up a similar number of weeks and pull back a similar number of weeks until eventually it takes off and has a significant rise. Now, if you're just trying to get intraday returns out of that, you're going to miss that whole beautiful run that's happening. You're not even seeing it building because you're looking at really short-term timeframes.

• 16:17Speaker 01

  But then those who are capturing that return, you could walk away for a few months and not have to do any trading and you've locked it in. So that reduces your risk significantly. But then for those of you who are doing that and you see that change, what does that mean? How do you actually have to manage yourself and the trades after that big acceleration? You know, what happens to your mindset? Do you all of a sudden feel like you can do this and it's just so easy? You know, that's the trap, isn't it? Trap for many. So markets are always changing and one of the biggest misconceptions among traders

• 16:59Speaker 01

  is believing that you'll know when the conditions have changed. History tells us otherwise. Really smart people, and those maybe not so smart, and I don't want to be rude here, but history tells us otherwise. You know, at times when you should go to cash or they should, because of course I'm not talking about you, the situation changes, doesn't it? And the markets changed, they don't give you, they don't announce when it's already changing, when the new next phase has started.

• 17:42Speaker 01

  All of a sudden, conditions change dramatically and that's what we saw when the GFC hit. So the market gave signs before the top, during the top, after the top, but most people didn't see it. Probably if you think of 80%, if we looked at a bell curve of this, probably maybe even higher, 90 something percent of people didn't see it. Experts were telling the queen about why they thought nobody saw what was coming, occurred in the GFC. You know, imagine that, these people who are at the top echelons.

• 18:27Speaker 01

  Now, you can be ahead of all that. I've heard comments before and people say, oh yeah, but I can't tell when the market's going to change. Yes, you can, if you're actually looking at the chart because those movements, as we show, we show you when we're talking about stocks on the Australian Stock Market Show each week, what are some of the signs to look for? And that's only really touching the tip of the iceberg, what we share on the show. You know, if this is really important to you, then you're going to invest in yourself, back yourself. You know, we will do that too. So markets don't send invitations announcing that they're entering in a new phase and conditions begin to change gradually.

• 19:12Speaker 01

  You might notice that there are lower highs, you know, we talk about that as well, beginning to develop. So the market makes a top, usually there's a steep acceleration into that and that's when a lot of people think, right, this is a really interesting stock, brokers are talking about it. A lot of unsuspecting people who are trading short-term try to get in on that run, thinking it's going to be the next drone shield and it doesn't turn out that way, only to find out that brokers were promoting it so that they could offload for their most important clients. Now, lower highs begin, the market has a sell-off, there's failed breakouts, increased volatility.

• 19:55Speaker 01

  You see stronger rallies that quickly reverse, more trades that simply don't follow through. Now, that's some of the telltale signs, but of course the ego, our egos don't, you know, they, our egos want us to move forward with what we're doing. They want us to prove that we're right, even when the signs are telling us otherwise. And the question isn't whether the market will change, the question is whether your strategy can change and adjust with them. That's one of the things that we are so strong at, is teaching you how to be nimble and

• 20:35Speaker 01

  flexible in the market with your income strategy so that you can actually adjust it as you're going. Many traders continue using the same approach. Now, as I was saying earlier, I worked with someone who was very intelligent and he was determined to get these AI systems going for himself, using some great technology. However, the strategy stopped working because the market conditions changed. And so it just, he could have, he realised when he stepped back from the chart that he could have done, applied some simple techniques that wouldn't have required anywhere near

• 21:17Speaker 01

  the amount of effort and monitoring that he had to do with the AI strategy.

• 21:26Speaker 02

  Hey podcasters, feeling stuck with your trading? Have you tried everything and still not making money? Learn to master the strategies that will ensure you achieve consistent profitable returns. Head over to Wealth Within and learn how our trading courses have changed people's lives and they'll change yours too. Like all our graduates, you'll be glad you did.

• 21:48Speaker 01

  So by the time that they realise that the market has changed, they've often given back months or even years of hard-earned gains. When the GFC hit, people were still hanging on right to the bottom and it wiped out three or four years of growth.

• 22:11Speaker 01

  We're talking about significant growth and people's retirement savings being wiped out.

• 22:20Speaker 01

  And it depends when you start as to what that looks like, right? So the next one is higher timeframe trap. There's another hidden danger which is that one. Many short-term traders become completely absorbed in the intraday charts and they're watching five-minute candles. Every five-minute move, that's just crazy. Every hourly breakout. Now, we've seen some breakouts on some mining stocks that have these classic setups that, as I said, you can trade that and then walk away after being in that for a number of weeks or months and just following that up.

• 23:00Speaker 01

  But I think that there's this fear that if they stay in it, that they'll be wiped out. Institutions don't stay in it overnight. They've got to pay to do that. It's costing them to hold those positions overnight. So a lot of institutions will intraday trade and close out those positions. As an individual, you don't need to do that.

• 23:24Speaker 01

  You just need to be able to identify trends and direction.

• 23:29Speaker 01

  Now, Dale's book, that is one of the best things that you can do to start. Start learning and understanding how this can work for you. That's on a bigger picture timeframe. The timeframe doesn't matter. You can take that from being years and months down, right down to days and weeks.

• 23:51Speaker 01

  But if you're only looking through a short-term window, you may completely miss that. Professional traders don't just ask, "What is today's opportunity?" They're not looking just at today. They'll ask, "What is the market telling me over the next six to 12 months, possibly even 18 months?"

• 24:10Speaker 01

  Now, that bigger picture insight gives them a huge edge. But if you can identify in the big picture where a stock is long-term, that's even more of your, to more of your advantage because you could be entering a stock in a really short-term trend that then changes on you. But then, that's fine. If you're trading short-term, you'll justify your decision when it's turned around and it's still going down, but you got out because you're on intraday or daily. All of a sudden, as part of those side, that transition to moving up and then down, you could be triggered in and out of so many trades through that move if you're trading really short-term.

• 24:54Speaker 01

  So that's really important, that bigger picture. Five questions that every trader should be asking. So rather than asking, "What stock should I buy next?", ask yourself these five questions. "Am I trading with the primary trend?" Or "Am I fighting it?" How many people are actually trying to trade short when the stock's telling them the complete opposite if they would just pan out and look at what's going on? Always trying to second-guess when there's going to be a major sell-off instead of waiting for confirmation, which is what we talk about all the time. So you're just making it harder for yourself. Number two, "Would my strategy still work if the market fell 20%?"

• 25:38Speaker 01

  If the answer's no, you probably don't have that income strategy that you're after.

• 25:44Speaker 01

  You've got a bull market strategy. That's an interesting thought, isn't it? And question three, "Am I actually measuring income or simply counting winning trades?" The winning frequently doesn't always mean you're building wealth because one large loss can wipe out months of successful trading. Now, that's a really interesting one because I've had so many people tell me that the thing that actually killed their trading was that they held on to one trade and it just wiped out everything that they'd made before that. Have you been in that situation? If you have, then, you know, I completely understand where you're coming from.

• 26:27Speaker 01

  So question four, "Am I looking at enough timeframes?" So you can identify opportunities on the daily chart, but that's not really going to tell you what the direction is. The weekly chart provides the context. And I've heard people talk about trying to put trend lines on a daily chart. Don't do that. That's just crazy. It's making you think that you need to follow that short-term, which you should be panning out and looking at least at a weekly chart, if not a monthly chart, which reveals where the market's really going. Look at the way that we talk on the show. We're always panning back to the big picture. Some people, the penny just drops straight away.

• 27:12Speaker 01

  The amount of people I've spoken to that said, "Oh my goodness, you know, I'm spending so much time and effort on this really short-term stuff and now that I see the big picture and I know how to analyse and read the market properly, you know, it's all changed for them." Now, professional traders understand that every timeframe gives you part of the story, right?

• 27:36Speaker 01

  Question five, "Do you know when your strategy has stopped working?" I think more importantly too on that is actually how to fix it if it has. Markets evolve. Strategies have cycles. The best traders don't stubbornly stick to yesterday's approach. They adapt before their results force them to. So this is what, there are lots of signs telling you that, you know, you need to stop and look at what's actually going on before it actually happens because there are going to be some great opportunities to make really good money coming up.

• 28:11Speaker 01

  So let's look at the five traps that catch many traders. Chasing income instead of protecting capital.

• 28:19Speaker 01

  That was number one. Number two, mistaking a bull market for trading skill. The third one is ignoring the higher timeframe trend and even go higher than that. Fourth, holding losing trades hoping they'll recover, especially if you, if your strategy is intraday and daily, which I'm not suggesting to go to intraday, you don't need to do it. Daily, weekly, monthly. So holding those losing trades hoping they will recover, that can be a complete disaster. And to many of you who write in about stocks that you've bought and they've gone south, you know, I take my hat off to you that you've got the courage to actually put that there

• 29:03Speaker 01

  and ask for a view on the, on the stock that you're trading to get some insight into it. And if, if that's you and you're sitting there with a stock that's in loss at the moment and you don't know where it's going, you can't do any analysis yet, you haven't got the skills, knowledge and skills yet, but you're planning, perhaps planning to, send in an email to our show. You can send that in to [email protected] and we'll answer it for you on the show.

• 29:37Speaker 02

  Hey podcasters, are you curious to learn how you can gain more confidence with your trading? Check out the Australian Stock Market Show on YouTube every Tuesday night from 7 to 8 p.m. Discover how you can become a more successful trader and take your trading to another level. Get your most burning questions answered with Dale and Janine. We look forward to you joining us.

• 30:02Speaker 01

  And finally, believing the next trade will somehow recover previous losses. That's a big one, you know, then you're trying to chase returns and these traps happen a lot for people. It rarely appears overnight. These opportunities develop gradually and you can see the setups if you're actually looking at the big picture.

• 30:25Speaker 01

  So these are reasons why these thought processes are quite dangerous. Five habits that keep traders on track. Are you ready for these ones? This is really, really important stuff. So what should you do instead? Protect your capital before chasing returns. This will mean that you will always have capital to continue to trade. There are so many people that have gone down the path of using leverage and trading CFDs and had their account wiped out. Instead of always making sure that they're setting a stop loss. And if, you know, Trump's tariffs comes out or something else that's going to change the market and cause your stops to be triggered. That's okay.

• 31:07Speaker 01

  You've still got capital to continue on and to be able to generate your income from. Trade with the primary trend whenever possible. That's another one. Review your strategy regularly, not just your latest results and use multiple time frames so you understand both the short term opportunity and the long term direction. Those need to be working in harmony. And when you're judging your strategy, don't look at it as to what you've achieved in the past. Look at this based on what the entire market is saying or the market cycle is suggesting and the forecast, not just after a few profitable months where the market rose.

• 31:54Speaker 01

  Most importantly, that's a good one, except that the market is always changing and your strategy needs to evolve with it. So I just want to say, look, there's nothing wrong with wanting to generate an income from the market. This is fantastic that people are actually doing this and think about that. As interest rates rise, one of the best things that people can do is have an offset account with the ability to use some of that funds, those funds to invest safely, to generate an income that could offset your interest bill.

• 32:30Speaker 01

  Set a goal to do that. And how do you do that? How do you get the knowledge, the skill, the experience and have the right psychology to go forward to do something that's that important? It's got to be done the right way. Now, whether you're trying to earn an extra few hundred dollars a week, doesn't matter the amount, to build that second income stream or eventually replace your salary, these are all worth doing well.

• 32:58Speaker 01

  Now, maybe you think that you can't study. I've met lots of people tell me that as a reason for why they can't do this. And it's funny because I'm mentoring some who've told me that. Markets have always changed. They always will. And the biggest danger is believing that the same strategy is going to continue producing the same result. The second one is actually chasing someone else's strategy and thinking that you're going to apply that and then not knowing what to do when conditions change.

• 33:34Speaker 01

  And some of these successful traders who get the knowledge, build the skills, develop a healthy psychology in trading and gain experience, these people, they don't survive because they can predict every market move. They survive because they recognize when conditions have changed and have the discipline to actually adapt to it.

• 34:04Speaker 01

  Now, I want you to think about something before you think, oh, I must get a trade on the market. Or you're, maybe you're on a job site and someone says, oh, there's this tip, you know, this stock's going to do really well. I want you to think twice because this is your hard earned money. You know, how hard do you work for that? What conditions do you have to work in to get that? So before you place that next trade, don't just ask yourself whether the stock looks good or whether the tip was good.

• 34:37Speaker 01

  Ask yourself an important question.

• 34:40Speaker 01

  You know, is this strategy the right strategy for today's market? How am I going to manage my risk?

• 34:48Speaker 01

  And what do I need to do, not just for this trade, but to make sure that now and in the future, I'm trading well?

• 34:58Speaker 01

  And, and that's to me is a no brainer in that you have to get the knowledge. How did you develop the skills to do what you do every day in your job? You needed to get the training that's so important and to actually get the skills you had to learn on the job. All right. So I know that you, you recognize that. And when it's time to change, you have to be prepared to do it, not just bury your head in the sand. So I guess that's the final thought from me, really wanting to encourage you to generate that income from the market, but do it as safely as possible. Put yourself first.

• 35:40Speaker 01

  No, not, not the ego first, but make the smart choice. Gain the knowledge, invest in yourself first, not in these companies that you're trying to make an income or just get a few hundred dollars from. Because by gaining the knowledge and investing in yourself first, you've got the potential to add another decimal place or two to that number, which really means that you're putting less effort into making more, if that makes sense. I hope you enjoyed my podcast today. I'm Janine Cox, Senior Analyst at Wealth Within. Bye for now.

• 36:19Speaker 00

  This podcast is brought to you by Wealth Within, a global leader in stock market education. For more information on our courses, head over to wealthwithin.com.au. Please note that the information in this podcast should not be considered personal financial advice.