Last year I made some money, not very much to become wealthy form trading (intraday and swing) but I did make enough to buy a not too expensive new car. This year, after being down about 5% I have just recovered my losses. My point: I have determined it only takes common sense, risk management and good use of software tools not to lose money. Why is it then that I keep hearing that 90% or even 95% of traders lose money. It is impossible for all those traders to be so stupid. Then, the following possibilities exist: (1)The 95% estimate is flat wrong. It is way less than that if the law of large numbers applies as there is a great number of individual traders in the markets, so the actual figure is near 50%. (2) The 95% figure is correct because there are not that many active individual traders in the market for the law of large numbers to apply. (3) There are many traders in the market but the law of large numbers does not apply because the probabilities are biased in favor of professionals, for some known or unknown reasons. (4): (2) above + the probabilities are biased in favor of professionals, for some known or unknown reasons. What do you think? Bill
Personally I think there aren't that many traders in the market. I don't mean people who take 2000 USD and blow it. I mean serious professional traders, Joe Public is completely brain washed into believing that if he invests his own money he will lose, hence the 95% myth. This perception plays into the perception that its better to give your money to an asset manager who will charge you a fee and will get rich. While poor old Joe Public will get the market return minus the asset management fees and brokerage. If you ask me the people who seriously approach trading as a business, who are properly capitalized, are not as many as you would expect. Basically people assume that because you should be able to get stinking rich trading then obviously everybody must want to do it. But then why is everybody so convinced that anyone who tries will blow up? For this reason I think not many try and those who can't get over the mental barriers. The rest work for banks and institutions and thats not the same thing as trading your own money.
(5) The markets facilitate redistribution of wealth from one group of people to another group of people. If the total amount of money in the pool is the same (which it is, more or less), then whenever someone makes money, it means that someone lost money. In the process of money transfer, everyone pays commission, which is a rake. By definition, if you trade as well as the "average" trader, you lose money because of the constant drain in the form of commissions and other transaction costs. That's all there is to it.
You are essentially saying that the market is a negative-sum game. The job of the trader is to find a vehicle in the market , and a time period (not the length of time, but time interval in the sense of t1 to t2 that he determines), where the game is a positive sum and where he is on the right side. In other words he should be aware of negative sum games, and choose positive sum games. There is always a machine on the street handing cash (from the back, but taking it from the front). People take any machine, and always go to the front. Also the machine has a dependency to rotate (what was front, can become back).
The number is actually greater than 95 percent. There are roughly 2 to 3 percent market participants who are professional. Thank you for your time.
Woudn't this depend on the market being traded? For example, if the US equties market goes up over a period of time, that is a positive sum game (excluding commissions and fees) because the total aggregate position is a long position. If the same US equities market went down over a period of time, the that would be a negative sum game. In a different market, say the S&P 500 Futures market, if the SP futures go up or down over a period of time the result is always a zero sum game (excluding commissions and fees) because the aggregate position is flat. Adding commission and fees reduces the expected return for each participant and, for example, would make the SP futures a negative sum game.
That is correct. However, we are not talking about the passive buy-and-hold investors who never sell for decades. We are talking about traders whose holding periods are relatively short (anywhere from a couple of seconds to a couple of months).