Are trader's skills really important?

Hi Hitman,

On one thread you wrote that you're up 52K so far this year. I know you're an experienced trader, and that result is only 2x higher than average US citizen yearly income.

I didn't start trading yet, and I'm worried that when i start i will have worse results than you.

I want to know, what's the probability that your trading result can be explained by pure luck, not by your skills. I know how to count that, but I have to get some statistics.

So, can you tell me how many trades you made this year, what was your av profit, av loss, and the % of profitable trades.

Best regards,

DT-waw


I would answer this in public because I want anyone with doubt about trading as a profession to read my response.

First of all, I am now up approximately 63K for the year with less than six weeks left in the year, with any luck I will probably pull 3x the average U.S. citizen yearly income, maybe a little more, maybe a little less.

But that's beyond the point, as I only have a little more than a year under my belt as a professional trader, and you have to understand that it takes on average, six month for a new trader to collect his first check, and a lot longer for them to fully tap into their full potential, and years and years to reach their prime.

I am a straight shooter and I will put it in simple words, if you don't have enough fund to day trade, then there is no way in hell you will have even half of my result, because capital is not an issue for me working for a proprietary firm (in fact, one of my biggest weaknesses so far is the inability to increase my size, as I have a 3000 share limit but I trade mostly 400-700 shares).

And I will go even beyond the above paragraph, if you don't know whether it is luck or skill, then you shouldn't be thinking about a career in trading. You have way too much fear on your mind, you are worried about too many things, there is nothing fancy about trading, you read/prepare/paper trade, you trade, you either make it or break it. You are worrying too much, I can tell you before you make your first trade that your paper trading result is total garbage as it doesn't account for SLIPPAGES, the number one killer of every system backtest. Just try it out with 100 shares, there is no other way to learn.

Luck is a factor in everything we do in life. Since you are from Europe you must watch soccer, is there luck involved in soccer when two teams are tied going into PK? Absolutely, that's how people make miracle shots and weak teams pull stunning upsets. Regardless of how great a player is, there is no way he can say whether his shot is going in or not, because the goal keeper can and will get lucky every now and then.

The same applies to trading (except of course it is far more complex), I don't care how good a trader is, there is no way to tell ahead of the time 100% whether a trade will play out the way it is supposed to, and whether the trade will be profitable at all for that matter. When we see a good set-up, I take it, and there is no telling ahead of the time whether I will make a dime or a point, I take what the market will give me.

That also answers your other question, I am not a system trader and I do not count winner/loser ratio as I consider it to be total garbage for a discretionary trader, simply because I respond to the market movement and I have no idea how much I will make on my next trade. I can tell you that my shooting percentage is about 53%, so my winners are at least twice as bigger as losers, once you take account of commissions. On somedays you have to scalp your way to a small victory and on somedays you score a point the way you scalp a quarter on other days.

Does luck matter? It is a factor in every trade, it makes good trades great, poor trades flat out nightmares. Does it matter in your long term success as a trader? Hell no.

 

>Does luck matter? It is a factor in every trade, it
>makes good trades great, poor trades flat out
>nightmares. Does it matter in your long term
>success as a trader? Hell no.

If there's someone out there that isn't convinced of Hitman's truth here, just go ahead and give me your money -- I'll get it eventually (actually, the better traders than I will probably get it before me but I'm working on that one)

Nice work Hitman

JB

 

IF market is random > expected P/L of any strategy or system =0 > there're no "skills" > results depend only on luck.

Now, I want to know weather market is random or not.

IF some system or strategy has a P/L far away from expected 0 > market is probably not random > luck is not the only thing that has a influence on results > there're "skills" ( some strategies, methods that work with non-random market ).

Hitman, thanks for info. 53% of your trades are profitable. Your av profit is 2x higher than av loss. You don't provide me with information how many trades you made this year. Assuming you're a day trader, I can say that you made at least 200 trades this year.

I put to the test the hypothesis of a random market. Can you, Hitman achieve your results when the expected result of any strategy - in the random market - is zero? Let's count!

probability of [ (making your # of profitable trades or more);(from total # of your trades);(with probability of a single profitable trade in a random market , <b>with your av win/loss ratio </b> )]

[ (0.53x200);(200);(0.3333) ] = 0.00000036%

IF the market was random when you were trading, THEN the probability that you made 53% of profitable trades with your av win/loss ratio was only 0.00000036%.

Conclusions are:
Market was not random > You have some skills which with conjunction of the nature of non-random market made your trading results > luck or bad luck had some little influence on your results.

"Does luck matter in your long term success as a trader? Hell no".

It does matter, but your strategy/skills/system are far more important <b>since you trade on a non-random market</b>.

Uuuufff... now I have a statistical proof.

Magna: this is not a "silly discussion". Luck is the only thing that matters in games, where players have the same skills and there's an element of luck.

I play scrabble. There's a group of players with very similar skills level. When we play with each other, after 6 or 12 games - believe me Magna and Hitman - results depends only on luck. But after 100 or 200 games when we calculate individual ranks, we can see that we have a little different skills. Somebody has a higher rank than others.

That's why some time ago I've started a thread "trading is similar to poker, scrabble?"

Seems like in trading, there're a lot of players who trade against the nature of financial markets. That's why they lose money and that's why other traders can get the money from them.

Hitman: I cannot day trade with 100-lots, due to SEC 25k rule. There're DJ Mini futures with only $1,080 initial deposit, but they have no liquidity plus volatility/commissions costs ratio is to low for these futures.

In the long term, I'm afraid that fully automated system trading will be so popular, and this will turn market nature into random.

Just like in scrabble. If majority of players will use computers for playing the game ( this is not allowed however ), there will be no big differences in players ranks. You can play scrabble with a computer program, and there're programs that beat the best players - <b>in a big number of games</b>. In a single game, luck has more influence.

Just like in chess. IBM's super-computer is better than chess-master Kasparov. Chess is a complex game, trading also. You know how many possible scenarios are in chess, sabena? Human brain can analyze them. Computer also can, more: <b>it can do it better</b>.

I want our discussion be based on some statistical, scientific fundamentals, not subjective opinions. That's why I've started this thread.

DT-waw

PS. sorry if I made some language mistakes in my posts. english is not my primary language.

 

I am a fervent believer in systems trading, and I believe that eventually there will be more automated systems trading the markets than people, but this is a long, long ways away. 50 years? 100 years? I have no idea. But the markets will never become "random" nor "efficient" because the underlying factors that affect the supply/demand curve are themselves non-efficient, because the actions that affect those factors (human behavior) is itself non-efficient. I don't understand why supporters of the "efficient market theory" don't comprehend this basic principle.

EFT also says that price reflects all available information. The problem is that all information is never available to all players. Those with more information have the advantage. Insider trading is an obvious example of direct information- both stock and in commodities where producers/hedgers have more information than you. There is also indirect information on external attractors which affect the markets. For example, everyone has a different view of how interest rates will behave, and the one with the most accurate view has the biggest advantage in applying this piece of information to the markets. Everyone has a different view of how weather patterns will affect this year's harvest. Those with the most accurate view have the biggest advantage. What about how terrorist activities will affect the airline industry, which in turn may affect other sectors. Etc, etc.

EFT also assumes "perfect competition" between participants but that will never happen. I may decide to sell all of my stocks not because I think the price will go down but because I want to buy a house and retire. I also don't understand how traders using different time frames, motivations, and risk factors can be considered "perfect competitors."

Also, the EFT explicitly states that price is not necessarily correct, only unbiased. This leaves plenty of room for a value based approach to the markets. Markets can only be unbiased if its participants are unbiased, but by taking a position you are laying your bias on the markets. In effect, you could trade the bias of traders, thereby trading the bias of the market.

These are just my personal thoughts on the subject matter. I am not an economist and may be wrong on a lot of points. If there's a Ph.D. who like to expound/refute my thoughts I'd welcome the knowledge.

 

it isn't really. your method only covers the first type of luck. consider this: during a raging bull market it is VERY easy to make 5000 trades in a row and end up net positive, after commissions. you just have to buy basket, sell later, repeat. according to your test, being net positive after 5k trades can only be explained by skill. i'm sure most of the people here would not call it skill in this case.

in my view, a trader can be called skilled only if s/he can consistently make money during the worst of market conditions. since the "worst of market conditions" is always yet to come, there is no way to be sure (in a strict sense) whether it's skill or luck.

- jaan

 

jaan - yes, I must clarify something.

I will call somebody skilled if s/he, make a positive result on a big number of trades <b> but only, when s/he trades with some method/strategy/system. </b> If somebody trades without a system (random entry and exit) end makes a profit from 5,000 trades, I will not call him/her "skilled" but lucky.

My test applies only to specified systems, not to someone who makes random trades - if I'm gambling and I win, how can anybody say that I have skills! Gambling or doing something without any plan is - by definition - not connected with skills.

To summarize my ideas:

1. IF you trade without a system/strategy/plan ( random entry and exit ) THEN your result depends only on luck, no matter on what market you trade ( random or not ) and how many trades you made.

2. IF you trade with a system/strategy/plan on a random market THEN your result always depends on luck no matter how many trades you made.

3. IF you trade with a system/strategy/plan on a non-random market THEN your result depends on skills and luck. The impact of skills is higher if your result is calculated from a greater number of trades.

DT-waw

 

still, i don't think this requirement will save your test. in my "raging bull" example above, it is really easy to define a corresponding system: buy a basket of nasd100 stocks at the open, sell N days later, repeat. profitable, yes. your test passes, yes. skill involved, no.

- jaan

 

While I know DT-waw for some (short) time, as well as having similar background (same origin), my response will be more personal than professional
When I read Your posts I recall my first years in trading. I wanted to UNDERSTAND all market mechanisms and KNOW all market reactions. That is why trading experience is a big lesson of decency.
I think that DT-waw has a great ability towards analytical thinking, but the question is whether trading the markets will satisfy his expectations in this field. It is a kind of art, but not rocket science (not yet, at least ).
Anyway I wish him a lot of luck

 

jaan, system you described is not a specified system. It has no criteria of opening and closing long or short positions. Why there're only long positions? What situation must occur to open a long position? Your "system" doesn't answer to this question. It's a pure gambling. Yes, it is some plan here, but it's not enough to call this "a system".


DT-waw