In my experience, traders lose money for three reasons (separately or simultaneously): 1) Bad money management skills. 2) Bad analytical skills. 3) Bad psychological skills (emotional condition while trading and discipline in following the trading plan). If a trader lacks either of those, she/he will lose money. If masters all of them, will make it. I cannot see, how trader, who has emotions under control, discipline of steel, sane money/risk management and a signal, which he knows for sure, works, because he knows it in and out and saw thousands of it's occurrences, would consistently lose money (losing trades is a different matter, just today I wrote the small rant about it, was in the mood. ).
In my experience, traders lose money because: 1) they don't have a profitable system (so no matter how well they follow the "rules", they still lose money) 2) they don't follow their system's rules (not that it really matters, anyway) The issues you mentioned don't even really come into play because even if they did everything perfectly, they still don't have a profitable system anyway. People almost always reply to this with something like "there are plenty of profitable systems out there, people just can't psychologically trade them." Usually those comments are made by gurus trying to sell you their MACD system or something.
Can you give an example of a "profitable system" (could just be made up, it doesn't have to be real)? I dislike the word "system" because to me it seems to imply something that can be programmed, and IMO all purely mechanical systems are doomed to failure sooner or later. I love the title of this thread, because it aptly describes what we are doing: taking an approach to trading, not pushing a button and running a "system." I've seen traders use approaches and methodologies that work, but I've never once seen a "system" that actually works.
Absence of the system is my point #2 (lack of analytical skills). Of course one has to research markets vigorously to notice patterns, which repeat themselves consistently, do necessary homework to see if the same was true in past, if it can be seen in realtime, test it to see if it really works and is not the case of self-deceiving, curve fitting etc. All this I consider to be analytical work. If it is done well, one surely will have a working system at his/her service. But of course, it requires A LOT of very boring and eye-killing work with charts and spreadsheet s/w. Which is not as cool as just "being a trader, making tons of money with a click of a mouse".
Sadly, very few discretionary traders will develop what you've described as needed to be consistently profitable. Mark
"System" meaning set of quantifiable rules that are followed. Discretionary trading is not really a "system." If you cannot look back and say "oh, I did this wrong because I did not follow rule number whatever and that's why I lost money," then you do not have a system. People who trade discretionarily tend to backward rationalize things so they can feel like they broke a rule rather than admitting that they don't have a profitable system. Like they'll see an inverted head and shoulders forming and think, at the time, "ok, time to go long" but then it turns out it wasn't an IHS, it was just L, LH, LL, and continued going lower, and then afterward they'll be like "oh well I broke my rule which is never go long during LLs and LHs" or whatever. What they mean to say is "I have no idea wtf I am doing." "Gurus" will hide under this guise, and then make excuse after excuse when their "system" doesn't work for their paying students. A "system" will support all its entries, even if they were wrong: "Conditions x, y, and z were met. Those are the conditions to go long," and then you go long. If that trade loses money, you still defend it, because you were following your system. You don't start making up crap or changing rules to pass it off an as exception. Of course, the vast majority of "systems" don't work. Just look at this forum and why everyone is pissed off that going long on bullish MACD crossovers isn't working. I believe that discipline to follow a system is not the main reason people lose money. The main reason is because they don't have a profitable system. Following its rules or not is irrelevant. It's like if you're trying to win the Indy in a Honda Civic. It doesn't matter if you're an awesome driver or a terrible driver; you're still going to lose.
You're talking about a completely programmable, non-hands-on, automated system, right? If so, do you have one example of one that has been profitable over the course of, say, 2 years? Also, can you make up some entry criteria that a user of such a system might have? You said "conditions x y z..." ... So, can you give an example?
There are basically two types of discretionary traders. The one 1a2b3cppp has described is often referred to as a discretionary intuition trader. In contrast, the other type that's not mentioned, is referred to as discretionary rule-base trader. A trade example will explain the difference between the two via trading a trendline breakout. * Discretionary Intuition Trader (DIT) - Will say something like if price breaks above the trendline...I will buy. * Discretionary Rule-Base Trader (DRBT) - Will say something like if breakout interval closes above the trendline, breakout interval has higher volume than the prior interval and the breakout interval has higher volatility than prior three intervals in combo along with only taking such trades within 10mins window of a key economic report or key breaking news event...I don't take trades between 12noon - 1pm est because I'm on a lunch break. Note: The above DRBT rules are made up as an example only. I have no idea if its profitable. Further, regardless to the type of discretionary trader someone may be...those other critical variables I mentioned in a reply to Daal will have a critical impact on trading results....variables like market experience, money management, discipline, position size management et cetera. My point with the above is that the DIT can not be backtested via a computer code or manually because it's too vague or generally explained. In contrast, the DRBT has specific rules that can at least be manually backtested although time consuming. Yet, both the DIT and the DRBT are still dependent upon those critical variables I mentioned awhile back in this thread as a critical factor in our trading results. Thus, don't fool yourself if you say you're profitable while ignoring money management, discipline, position size, proper trading equipment, commission costs et cetera. Yet, this gets into the argument that any discretionary rule-base method can be coded into an automation or mechanical trading system. However, there's been a few traders here at ET that have challenge programmers to code their rule-base discretionary methods. Programmers later admitted they couldn't code any market context used as a rule with price action rules. I believe NoDoji is a DRBT after she explained in an earlier reply to Daal that she manually backtested the rules of her trading method. In my opinion, that's a good way to approach trading. Yet, I'm not saying it's the only way to do it. Thus, if you're profitable via using an automation or mechanical system...congrats. P.S. Most guru systems are automation or mechanical systems. Mark
Even intuitive trading or whatever is still rule based, it's just the rules are being analyzed in your brain nearly instantaneously and it's mostly subconscious and would probably be very hard to quantify even if they tried. Often, just because someone is good at something, it doesn't mean they are a good teacher. "How do you do that?" "I don't know, I just do."