Are trader's skills really important?

Discussion in 'Trading' started by DT-waw, Nov 21, 2001.

  1. DT-waw


    Hi everybody,

    Question in the title is maybe silly for many of you. But think about it...

    1. If you have no system, no trading plan, your result ( excluding commissions ) depends only on your luck.

    2. If you have a system or a plan, your result depends on certain future market behaviour ( level of volatility, # of gaps, etc. ). In general, trading systems can only follow the trend or play against the trend. If trends will rarely change, systems that follows the trend will win. If trends will often change, system that trades against the trend will win. You can't predict how long trends will exsist, when they will reverse.

    3. Same applies to life. Can your decisions bring you more success? Your life decisions will bring success only if things/events/situations are "on your side". If you don't have luck, you'll not succeed. Think about approx 4,5 bilion people in this world who's living standards are very poor. When we are born, we are all the same, or we differ due to genetic or other issues that are beyond our control. Than life goes on, some people have a great life, some not. Is it because people have completly different level of skills, intelligence? I don't think so.

    4. How to check is your trading result was made by pure luck, or does your skills create good result?

    Let's say, everything depends on luck. So, the expected value of your result is zero. What's the probability that your trading results can only be explained by luck or bad luck?

    I think I know how to check this. I give an example.
    Let's say your trading statistics are:

    Average profit: 8
    Average loss: 4
    Number of trades: 100
    % of profitable trades: 50%
    Total P/L : 200

    On average you should have total P/L =zero. With av.proft/av. loss ratio =2, % of profitable trades should be 33.33.
    But you make 50%.
    What's the probability of 50% or more successes in 100 shots, with a 33.33% chance of a single success? Answer: only 0.02%

    So, if you have a system that have 50% profitable trades, with av win/loss ratio 2, and 100 trades, probability that it's result was created by luck is only 0.02%.

    If someone of you has a trading system like that, I would have to say, that not everything depends on luck and trading skills are important.

  2. Good luck? It is with great heartfelt thanks to all who think that luck has something to do with it. That is why we pay no state income tax in Nevada (it is paid by gaming revenue from those who believe in luck), and it is why we cannot play blackjack in the casinos, because skill will always win, and "they" don't want you to win. If you can read a book, they won't let you play, is what we say. However, the "real casino" of Wall Street actually rewards those who make their own luck by educating themselves into the art of trading. So make your own luck, and, by the way, Good Luck!! :)
  3. Turok


    Uhhh...Good luck!

  4. dottom


    Discipline & risk management are the most important, but you still need a solid methodology. Everything you read touts discipline & risk management. I think any newbie will think that if that's all he needs, no problem. But the thing that so many of these books do not go into detail on is a sound methodology or mechanical system. This is obvious- if you have a winning system why reveal it? Some people will reveal basic thinking or methodology but they'll never give you the guts of their system. If they sell a newsletter, chat room, or service to give you signals and "educate" you, realize going in that you are paying for only 80% of the picture. They likely have a solid system or methodology but aren't going to give you the other 20%, or they haven't discovered that 20% for themselves so they're in the service industry. They usually end up hyping discipline & risk management. But believe me, you still need a system or solid methodology.
  5. Jeffo


    dottom are you saying theat there are people who have secret ways of making money that nobody else knows about? And all this time I thought it was simple s/r, TA and tape reading.
  6. Hi

    luck is , imho, something that comes out of the blue.
    One has absolutely no influence about "luck " - it's simply an event that happens from time to time. ( or maybe not for some ).

    Trading is what I call a probability game, and it has nothing to do with luck at all.

    There are certain indicators which allow the skilled trader to draw sound conclusions from current crowd behaviour about the current status of a market.
    Based on his skills, the trader is able to weight the probabilities of a continuation of a move or a reversal , will take his positions accordingly - and will be right more often than not.

    In addition, any serious trader will apply certain money-managment strategies, allowing him to determine the maximum amount of risk he's willing to take to find out, whether his assumptions / readings about the market are right or wrong.

    All these preparations lead to a "gameplan" which defines exactly what to do before, during and even after a trade.

    The experienced trader knows exactly for which paramaters or criterias ( called setups ) he has to look for in order to get a confirmation for his trading plan and his trade.
    If more than xx% of the assumed events / triggers / parameters actually happen at some moment during the trading day, they will built the fundament for a high probability trade. Therefore, a position will be taken accordingly. Otherwise, the trader stands aside. He's not going to force his "luck".

    If a trader doesn't know in advance, how an opportunity should look like, he'll be probably not able to detect it anyway ( with or without luck ) and therefore will not profit from it.

    All of this has nothing to do with luck at all. It's a systematic approach with stringent rules and guidelines to follow. In order to generate consistently profitable results in trading, a trader needs this systematic approach - relying on pure luck is simply not enough to make a living of it.

    Market analysis ( or analysis of human behaviour for that matter ) is always an art rather than a rockbottom sience.

    Sentiment, technical and other market indicators are just that - indicators - not more, not less. They "indicate" certain upcomming events, but they don't prdeict them with absolute accuracy.
    But having the necessary skills to interpret those indications correctly enables a trader to be consistently profitable - no luck involved at all.

    You know how a trade has to look like to be an opportunity, you find it, you take your position. You know which parameters / criteria to use to determine your exit. Once triggered, you just get out and take your profit home. Nothing spectacular and certainly nothing you would call "plain luck".

    You'll find that skilled traders are more successful, the longer they follow a systematic approach. Once a trader had success and starts to think, he could make a living in trading without all that homework, he'll probably be short before the end of his carrier.

    That said, I wouldn't rule out, that a decent portion of luck can add substantially to the bottomline of your results, but it's nothing one can rely on.

    A good example for " being lucky " was the surprise move of the FED back in January 2001.
    Those traders who took a long position a few moments before the news of the rate cut hit the wires did it probably, because the markets where due for slight reversal anyway after a period of heavy selling.
    The only "lucky" part of this long trade was, that the reversal following the FED's annoncement was of a much larger magnitude as could have been expected.
    Instead of a few ticks, you could have made really points on the long side due to an unpredictable, favourable event.

    Even those skilled traders who were still short at that moment and didn't read the signs of a brief reversal correctly prior to that move, would probably have reversed their position quickly and participated in the brief bull run. Again, nothing to do with luck, but realising, that all the parameters / criteria justifying to stay short were not given anymore.
    So one had to get out of the short trade and reverse position, because probability for a sustained upmove was much higher due to these news ( at least for the rest of the trading day ).

    best regards and
  7. monee


    Can we not observe the mrkt environment ,stocks sector,and individual behavior of stock to slate the odds in our favor?
    If we keep tight stops and let the winners run in trending enviroments that doesnt help?
    Seems like your post is saying trading has the same odds as a slot machine.
    Just my opinion your results may vary.
  8. You have good points about having a game plan, with one exception I would agree with you. That is that there is a "game plan" of not having a game plan...that is to respond (not "react" which is usually costly) to the market...and when you realize that the market will do whatever it wants, and that you will see different results from the same "set ups" a great deal of the time, you can only plan for risk control and offensive entry points (again, IMO).

    We are basically agreeing here, I just like to come in fresh each day, and dance a different dance each day.
  9. dottom


    Yes. To be accurate I would change "making money" to "successful way of trading" which would involve all of the above. "TA" is a very general umbrella.

    But even those traders with the best systems may find that that system/approach no longer work as the markets change. Also, those traders can be wiped out in an instant if proper discipline and money management are not applied (look at LTCM). Heck, look at Enron.

    My point was simply that many books and educators hype discipline & money-mangement, but I'd rather see a system or methodology first. If you've got discipline & MM but don't have a system you've got nothing. If you have a system that works, then you have a chance to make money.
  10. Hello Don,

    I agree with your statement. When I said, that skilled traders do have a plan, I meant, that this does plan does include the fact, that markets cannot be predicted and do what they want to do.

    Having a plan doesn't necessarily mean, to trade only ones personal believes or perceptions - that would be merely speculating or even worse - trying to be right. A costly mistake / misunderstanding of the game-plan concept.

    Such a plan should answer already at least the following everyday questions with a high probability ( not 100% of course ):

    Which market (s ) do I want to trade ? ( certain stocks, futures, commodities, bonds etc. )

    Which intermarket developments can influence the market I want to trade ( i.e. simple example Oil-price vs. Oil stocks )

    Any major reports due which can influence this market or any closely related market ?

    If I trade stocks, which stocks may influence the price-movements of the ones I want to trade. How is the options-market in this stock and which influence can this have.

    Where are important support & resistance-levels ( multiple timeframes ), i.e where can I expect reversal to occur in the markets I want to trade?

    Will this be an intradaytrade or will I carry this trade ( or parts of the position ) over a couple of days due to increasing strength or weakness in this market.

    How much money will I put on this trade ? For Intraday, for multiple day.

    Will I use options ( because of chances that I can reap additional profits from volatility changes, aside from price movement in the underlying ) or trade the underlying directly.

    Where will I set my stops ( risk definition ) intraday , multiple day.
    Will I use options as stops , place stops only mentally or physically with my broker.

    If my entry and / or exit points are hit, how much slippage will I allow to consider the trade still valid in terms of Risk / Reward.

    Which alternative markets ( i.e. other stocks ) will I check in case the pre-selected market doesn't behave as expected or news destroy the original trading concept for this market.

    Answer the same questions as above for your alternative markets.

    Maybe there are people out there thinking that this is a fruitless effort, since markets do what they want to do. But imho, the simple process of thinking about all those points ( in form of a checklist ) helps very much, to treat the whole trading business very seriously. It also helps, to have such a game plan at hand during the market hours, just because you may feel better prepared. If you are better prepared, you are less vulnerable to emotional rollercoasters.

    I'm not advocating to trade like a programmed robot. Trading should also involve fun. But fun comes with success and success ( in most businesses at least ) comes from sound planning and professional execution of these plans.

    Some people say, that i.e. russians don't even go to the toilet without having a plan.
    I'm not from russia, but still think, that having a good plan and understanding of what , why and how you will do something when "A" "B" or "C" happens is most important in trading.

    Best regards
    #10     Nov 21, 2001