bbmat I have missed somehow why you are so certain that most small traders fail. Could you please reiterate?
bbmat: With all due respect, I think you should get off your i-banking high horse. Sure, there are CTAs who run money purely on technical trading systems. John Henry uses trend following. So, did Richard Dennis. Ed Seykota, etc. So, there's some merit to TA. But to get a good trading TA system is nontrivial. Not as easy as looking at some charts and writing a simple program. There's more to it than that and none of it is published. Yes, most of TA is somewhat rubbish, but some of it can be useful. Second, you wrote,"Such guys were often among the elite of trading divisions of large I-Banks and then opened their own funds. But they do not make by far as much money as the top prop trading guys at Goldman or the like. If you had ever worked in a larger I-Bank you would know the people talk about others all the time. If there is a big swinging dick around and leaves, half a year later he or she is forgotten. That is how the street is like." Yes, the top talent at ibanks often go out to form hedge funds. Why? You think they do it just for fun? They do it because they think they will make MORE running their HF than working at an ibank. So, think for a minute. I don't know how much the GS prop traders make. Probably low 7figs. There's no one who is a billionaire or multi-hundred millionaires at i-bank(maybe excep the CEO with their huge options etc.). In the hf world, you have plenty. Soros is a billionaire. Buffett is a billionaire. And many multi-hundred millionaire. Jim Simons who run Renaissance hf got paid like $280M last year. The guy who runs Citidal got pay $200M. And the list goes on and on. I don't know many prop trader at GS or any ibank making that kind of pay. I think the most will probably be in the neighbhorhood of $10-$20M. And not even that. That's like 1 guy out of the entire desk. Obviously, NOT all hf managers make that much. But it is the prospect of making that much that they are leave an ibank to form a hedge fund. don't you agreed? I don't want this to a pissing contest or whatever. Maybe you work in credit derivatives and you think you are hot shiet. I'm sure you do well and the people on your desk do well. But if you are going to compare pure numbers, I must admit the list of richest people on Forbes in finance category are still dominated by hf managers. Or more specifically the list of highest paying finance professionals are still people in the hf world. There's no way in hell you will get pay $280M at ibank! Just not possible. That's more than the CEos entire lifetime package or whatever. Just get off your high horse. Besides, most people on the sell side are middle man or executioner. It's not like the bank itself has a few hundred billion. They take a snippet at each transaction call the bi/ask spread. And for complex products like credit derivatives the spread is wider and that's how the desk makes money. But eventually other people catch on the game and the spread narrows. Competition drivs spreads down. Same thing happen on MBS desk. In the 80s, Solly dominated that market. Now the margins are very narrow now cuz the market has matured. When credit derivatives mature, your swing dicks will have their egos in check.. good luck to all!
http://www.elitetrader.com/vb/attachment.php?s=&postid=387441 Another 20 cents: Whatever % mentioned could be merely our guess. Before anyone produces a statistical/survey report (which may or maybe be available in the trading field due to various reasons), perhaps finding (or picking by feeling) a probability distribution would be a logical attemp, I would just guess. According to the acrsine distribution, probably only a very small (say 5) % of traders would make big profits, and only a very small (say 5) % of traders would make big losses, and majority (say 90%) of traders would make small profits (say 45%) or small losess (say 45%) during their trading life/process. That is to say the statements such as: About 95% traders fail to make big profits (as many traders always dream of); and About 50% traders are profitable, could be all correct and valid ones.
Okay, I will go for "95% of traders fail to make big profits", but this 95% of traders fail is just hogwash, pure and simple.
Why not ask the sponsoring brokers here, like IB how their traders are doing. . I'm sure if most are doing well they will be happy to give stats.It would be interesting to see the figures
Potentially, some other (probably) valid statements could inlcude such as: - Not only about 5% traders could make big profits, but also another 90% traders are in the process approaching to make big profits, except only the remaining 5% roughly (without proper knowledge) would make big losses due to some mistakes that are likely caused by unexpected market movements (Some traders may prefer this one more, possibly according to their profitable experience/ observation/ etc.) ; - Not only about 5% traders could produces big losses, but also another 90% traders could sooner or later encounter big losses, as only 5% (learned, knowledgeable and well-prepared ones) could make big profits as long as they are still lucky (Some famous figures already mentioned would be examples); - Etc. Q I started trading in 1978. At the time, I was managing a commercial casualty insurance agency in the subburbs of Detroit, Michigan. I had a very successful career and thought that I could easily transfer that success into trading. Unfortunitely, I found that was not the case. By 1981, I was thoroughly disgusted with my inability to trade effectively while holding another job, so I moved to Chicago and get a job as a broker with Merrill Lynch at the Chicago Board of Trade. How did I do? Well, within nine months of moving to Chicago, I had lost nearly everything I owned. My losses were the result of both my trading activities and my exorbitant life style, which demanded that I make a lot of money as a trader. From these early experiences as a trader, I learned an enormous amount about myself, and about the role of psychology in trading. As a result, in 1982, I started working on my first book, The Displined Trader: Developing Winning Attitudes. ... It took seven and a half years and was finally published by Prentice Hall in 1990. --- Trading in The Zone, Mark Douglas UQ These books have been many many times mentioned and suggested by many posters here. But how many successful traders making (or having made) big profits would still have the time/ energy/ motive to Start writing a good book in order to help others to become more effective and profitable traders, probably better than the writer himself/ herself?
Oddiduro, a simple answer that you might hear a lot is:" Because many people let their emotions get into play. If they were to trade a system then they would not lose." This, fortunately is not my opinion. Of course trading on emotions is already a lost game. But what contributes most to small traders losing it all is the relatively high commission costs, slippage (=lack of real speed and accuracy of executing trades), the lack of knowledge of statistics and the missing of an own opinion on the future development of markets. This all is not a problem to larger speculators and hedgers. Hence, they win in the long term and small traders lose. BTW, hedgers have got different motivations than speculating and hence their payoffs should be judged relative to their risk and investments. Larger traders/hedgers enjoy much lower commissions, their slippage is minimized as they often deal through established broker relationships, they trade through highly sophisticated trading systems (with xtrader being on the lower end of the systems available to them), they have access to statisticians and quants (which allows them to assess probabilities and risk in a much more refined form than small traders), and because larger traders and hedgers often trade positions, meaning fundamental analysis play a much larger role than for small traders (as fundamental analysis is quite cumbersome and can get quite complicated to come up with useful figures and quantification). Now, why do I compare small traders with large traders and hedgers? Talking of commodities markets, they are fundamentally different from stock markets. In commodities, money made is always money lost by another party. So, that party that enjoys all the advantages takes funds from those parties less equipped with knowledge, execution platforms, information, and low execution costs. Therefore, in the long run probabilities are very very high that a small trader loses in commodities against the big fish (unless, and this is my opinion, one develops a view on the markets and is more often right than wrong; given, sound money and risk management is applied). This being more right than wrong is what I call having an edge in the markets. I firmly believe that trading technical systems is not making any money in the long term as commission and slippage is too high and as such systems fail to take into account the (almost) perfectly efficient markets. Small traders, asserting that their systems profit from such tiny imbalances are in my opinion making up stories and most often have something to sell to the public (which is their flawed systems or advise or what have you). This is, in a nutshell, why I believe a small trader in commodities should focus on fundamental analysis mixed with some technical analysis (for the sole purpose of trade execution). Almost all studies have proven that small traders, who trade on technical analysis only, lose over time. Ok, I admit its not an academic proof, however, I have not found a single (serious) study that shows that over long time technical traders are profitable. (now there are guy who will attack me for having said that, citing some references where someone analyses market imbalances. But as I mentioned, those imbalances, in my opinion, cannot be beneficially utilized by a small trader).
sorry if it came across as being cocky. I mentioned my profession for the sole purpose of underlining some of the claims I made in my previous posts, never to show off. I liked your post about hf managers pay, however I like to point out 2 things that I found you might have mixed up a bit. First, the CEOs make significantly less than the top shots in I-Banks (even including their options and retirement packages or what have you). The big guys can indeed make much more than just 10-20 mio a year. There were analysts and sales guys a few years ago (ok its connected to their success during the bubble) who made 100 Mio a year (including boni), something even the brightest and most successful hf managers can dream about (I am not talking about a one time pay but an annual pay). Hedge funds can be hot like shxx but if something bad happens, although money is locked up contractually, clients start kicking that managers butt, or the manager is forced to get into cash almost entirely because a strategy has not panned out as expected. That is why I pointed out the meager performance of even the top hedge funds over a 5-10 year period. If you call 20% a high yield (annualized) for taking such great risk from an investor perspective then we might differ in our risk/reward ratio expectations. But I would demand a rather 40-50 % payout, given that my investments could tank up to 50% in any given year. Lastly, having heard a lot of stories of former I-Bankers opening their own funds, its in 90% of all cases not the prospects of making more money that drives them to take such steps, but almost always the freedom of being ones own boss and managing money in the way one thinks is most beneficial. I-Banks can be very political and hierarchies can be incredibly demotivating. Deciding whom to hire and how many, how long and when to work is very enticing to such people, not necessarily the money they can make.