95% of traders fail???

leapfrog · Dec 25, 2003

Quote from bbmat:

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).
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I am sympathetic to your comments above, having spent 20 years in a money center bank with highly compensated HF trader types - the salaries + bonuses you mention correspond with my experience also. What continues to intrigue me though is that on this board and others, now and then, you hear about traders that consistently grind out steadily increasing equity curves by whatever means. They seem the rare bird indeed - but at least a handful seem to be able to do it. My guess is that this scant evidence is what motivates the other 95% of us to try to replicate that. I gather your point would be that we should all face reality and stop chasing such windmills (and maybe you're right - the jury is still out for me - I am one year into trading and haven't reached consistent profitability yet.)

Your post was thoughtful - thanks. rcm.

oddiduro · Dec 25, 2003

Quote from bbmat:

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).
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Thanks bbmat, another insightful post. I think most small traders are looking for lottery type returns, and that is what sinks most of us. Coming out of engineering, and then out of the medical profession, I know how to do research. My research is showing that it is easier to make money, the more of it you have. This is why I am not down on TA. A simple stochastics study will make money if you have a six figure account. Of course, the effieciency of such a system would make trading OPM unthinkable, but if one has 100K laying around, it would generate enough extra money for a vacation or two. I also agree about considering fundamentals in a trade, but wouldn't the chart reflect the fundi's before the numbers actually come out?

Insomuch as most system failing over time, it is my opinion that a systems trader should be employing concurrent systems in the market. Sometimes the same system on a different timeframe will do, but one should be running at least two systems.

Overuse of leverage hurts a lot of folks too. I think that is what happened to LTCM wasn't it?

Unfortunately, most folks are starting with 2-10k, so they have to set tight stops, which almost always hurts a system. Maybe this is where the 95% comes in.

Anyway, thanks for helping to make this thread a good and rather civilized discussion.

Regards
Oddi

OddTrader · Dec 25, 2003

Quote from bbmat:

... (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.
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Just curious:

Why some traders would suggest that an edge (in terms of such as siding, timing, etc.) is not so important (comparing to other factors), if not critical, to long term success (good profits)?!

OddTrader · Dec 25, 2003

Quote from bbmat:

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.
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Due to so many different factors, how many would become top-notch traders in those I-Banks on the Street?

Probably much lesser than 5%!

trade4succes · Dec 25, 2003

Quote from OddTrader:

Due to so many different factors, how many would become top-notch traders in those I-Banks on the Street?

Probably much lesser than 5%!
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You must be really really really valuable to the firm to make "just"
10-20 mn a year, or +100 . How much do you need to make it to one of those richest 500 people of america lists?

That amount of cash makes up a significant part of yearly profits of the entire 10000+ employees firm.

iceman1 · Dec 25, 2003

Quote from bbmat:

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).
More...

bbmat...

for a guy who purports to know a lot, and have insight into the markets and traders.... your posts on small traders and failure leaves much to be desired!!! In fact, your "argument(s)" in support of your proposition couldn't win a re-trial of the O.J. case.

I will add, having traded for many years off-floor before it became the "thing to do" and before there were more than maybe 50 hedge funds... that a primary reason for losses and "failure" ala this thread is because hedge fund traders and their ilk are NOT trading their OWN money! :eek: And in keeping with your anecdotal comments/proposition that small traders (too often) fall prey to (their) emotions and react/over-react.... thus incurring mounting losses while random walking through the equities/futures markets... there is NO doubt that trading one's own capital more often than not greatly exacerbates anxiety, fear and greed... and can spawn losing habits.

Please don't tell us that because mangers get paid on performance etc. etc that this equates with actually placing your own capital at risk each day. Nope it sure doesn't!

Trading OPM is not the same.... period!!!!

Do you REALLY tihnk commissions are the primary reason for alleged failure?

LOL

Have a good 2004...

Ice

OddTrader · Dec 25, 2003

Quote from trade4succes:

You must be really really really valuable to the firm to make "just"
10-20 mn a year, or +100 . How much do you need to make it to one of those richest 500 people of america lists?

That amount of cash makes up a significant part of yearly profits of the entire 10000+ employees firm.
More...

It would be possible that for many traders (from a range of different backgrounds), the probability of becoming a hedge fund manager (or a very profitable private trader) would be many times higher than becoming a top-notch trader in any I-Banks on the Street, I would think.

optgamvol · Dec 25, 2003

Quote from OddTrader:

Just curious:

Why some traders would suggest that an edge (in terms of such as siding, timing, etc.) is not so important (comparing to other factors), if not critical, to long term success (good profits)?!
More...

Oddiduro,

if I understood your question correctly then I would say that I strongly disagree with such traders that you mentioned. How do you want to make money without an edge. As a small trader on is already at a disadvantage compared to large traders and hedgers (for the reasons given in one of my previous posts) so what else will contribute to profiting than having an edge?
Whatever risk management you use, whatever timing you use, whatever leverage you use (all of those of course important variables), but if you have good reason to believe that probabilities favor the market to go up and you go long, and if one can be right in such way more often than wrong then this is the edge I mean. Without such edge loss is a certainty.
In essence, being long when markets are long AND being short right before markets go down. If one can be in tandem with the markets more often than against the market that is an edge because it would mean that such trader puts forth good analytical skills (over the long term this can be considered a valuable skill as the probability of luck would become insignificant). The fine tuning comes in later and decides over a little less or more profits taken from those trades. But without an edge such as that money is for sure to be lost in my opinion.

oddiduro · Dec 25, 2003

Quote from bbmat:

Oddiduro,

if I understood your question correctly then I would say that I strongly disagree with such traders that you mentioned. How do you want to make money without an edge. As a small trader on is already at a disadvantage compared to large traders and hedgers (for the reasons given in one of my previous posts) so what else will contribute to profiting than having an edge?
Whatever risk management you use, whatever timing you use, whatever leverage you use (all of those of course important variables), but if you have good reason to believe that probabilities favor the market to go up and you go long, and if one can be right in such way more often than wrong then this is the edge I mean. Without such edge loss is a certainty.
In essence, being long when markets are long AND being short right before markets go down. If one can be in tandem with the markets more often than against the market that is an edge because it would mean that such trader puts forth good analytical skills (over the long term this can be considered a valuable skill as the probability of luck would become insignificant). The fine tuning comes in later and decides over a little less or more profits taken from those trades. But without an edge such as that money is for sure to be lost in my opinion.
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I am not Oddtrader. But it appears that we agree on the edge thing. The edge is finding the greatest probability of success. The provebial "black swan". But one must stay alive long enough for it to appear.

Regard
Oddi

optgamvol · Dec 25, 2003

Interesting contribution, Iceman1:

But don't you make it quite easy for yourself by hinting that maximizing returns is quite easy for fund managers and making good money by trading ones own capital is difficult? I do not believe so. There is huge competition for funds among fund managers be it hf or mutual funds or money market funds or what have you. Your performance is measured all the time, you are responsible to your clients and firm, your entire career hinges on your not making too many mistakes. Your name is known and your name will be even better known when your fund tanks. Sorry, but I think that trading your own capital makes many things much easier than doing it for other peoples money. You are not responsible to anyone else than yourself (unless you have a serious problem with separating trading funds from funds available to your private life; if one cannot separate those then I suggest to stop trading because trading then will become a game of life and death which will heavily influence your decision making process).

BTW, all the points you mentioned were not important points that I tried to get to so I suggest you to re-read my posts and re-think your comments. I did not try to differentiate between trading own capital and other peoples capital in my previous posts but I presented one way to look at how futures markets operate and that small traders are at a significant disadvantage to larger traders and hedgers. But for the sake of argument I have to say that your point does not seem to be too logical: If it were true that not trading ones own capital (which is most large traders=funds and the like & hedgers) is the primary reason hedge fund managers and the like make money it would also mean that trading ones own capital would mean one loses money, because the counter parties of all larger traders and hedgers are small traders (subtracted by the trades between hedgers and large traders). don't you think you use a pretty convenient excuse to explain away your losing money? At least this would mean all traders (or at least 99.5%) here on ET and all other small traders should immediately stop trading as it would mean that they would lose money with trading their own capital because they could not handle those freaking emotions connected with their own money being on the line. Not convincing to me at least!!!

One more point: Should the comments you made reflect your trading environment and emotions I conclude that you must be heavily invested in the markets and that the quality of your family life rises and sinks with each tick change. Pretty scary if you ask me. At least I don't want to be your spouse in this case ;-)
Maybe you should lighten up your trading equity and build up reserves for you and your loved ones, you otherwise will really be heavily influenced in wrong ways in your trading decisions. But saying that trading ones own capital is a primary reason of loss for those losing money in trading is very short-sighted in my opinion. Sorry, but I cannot help feeling you are a disgruntled daytrader who already wrote numerous checks to his brokers, and every time right after refunding the account you trade the maximum leverage (max. no of contracts that your equity allows) and with each loss your available funds for margin will decrease and you still trade your max. no. of contracts. You sound as if you might need to reconsider your trading style if you are so freaked with your funds being risked. Trading smaller might help ;-) ((If this is not you then I appologize I then must have confused you with my grandma)) ;-)

BTW, I never said that trading on emotions is a reason why small traders fail ( I actually argued against it). Maybe reading a bit more carefully than being fully consumed by sunday-press stories of O.J. might help ;-)

Also a good new one to you!!!

Quote from iceman1:

bbmat...

for a guy who purports to know a lot, and have insight into the markets and traders.... your posts on small traders and failure leaves much to be desired!!! In fact, your "argument(s)" in support of your proposition couldn't win a re-trial of the O.J. case.

I will add, having traded for many years off-floor before it became the "thing to do" and before there were more than maybe 50 hedge funds... that a primary reason for losses and "failure" ala this thread is because hedge fund traders and their ilk are NOT trading their OWN money! :eek: And in keeping with your anecdotal comments/proposition that small traders (too often) fall prey to (their) emotions and react/over-react.... thus incurring mounting losses while random walking through the equities/futures markets... there is NO doubt that trading one's own capital more often than not greatly exacerbates anxiety, fear and greed... and can spawn losing habits.

Please don't tell us that because mangers get paid on performance etc. etc that this equates with actually placing your own capital at risk each day. Nope it sure doesn't!

Trading OPM is not the same.... period!!!!

Do you REALLY tihnk commissions are the primary reason for alleged failure?

LOL

Have a good 2004...

Ice

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