The sad truth about trading is

talontrading · Nov 1, 2009

I'm not sure I agree with you on this one. I would say the skills required for effective model building differ from the skills required for trading. That's why almost all funds that hire physicists also hire traders to apply those models.

Some of those spectacularly brilliant people I knew who failed as traders were physicists or other scientists... I even had some of these guys build models that I was able to apply effectively, but when they were given some latitude to trade for themselves they screwed it up every time.

Trading is more about risk management, self control and discipline than it is about figuring out complex trading secrets. I could write a profitable trading system on the back of a cocktail napkin but not 1 in 1000 people would be able to apply it.

Quote from indexer:

And, automated trading is a different animal. Here, the intelligence (skill) required is mostly logical-mathematical. That is why the hedge funds hire physicists and mathematicians.

Floor trading requires bodily-kinesthetic, logical-mathematical and interpersonal intelligence. In the pit, you have to get noticed, read others and properly signal your trade. You have to figure math in your head and you have to have the political skills to get others to trade with you (or feed you orders).

Many floor traders who tried to become screen traders did not make it because they did not have the right intelligences (skills) to make the transition. Many off floor traders got taken to the cleaners in the pit like Trader Vic described in his book when he visited the CME.
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catholic_trader · Nov 1, 2009

Quote from talontrading:

Come back a year from now and let us know how that's working out for you lol.
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I'm coming up on 2 years as a follower and so have learned absolutely nothing and like Posh Spice am quite proud of it

riskfreetrading · Nov 1, 2009

Quote from talontrading:

I could write a profitable trading system on the back of a cocktail napkin but not 1 in 1000 people would be able to apply it.
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Yes! One of the reasons is that the guys will have another model in their heads. Most likely the person who apply it would have no opinion, not intelligent, has no skin in the game, and is detached. In other words, he does not care, and/or does not have the ability to care.

Now is Now · Nov 1, 2009

Quote from talontrading:

Trading is more about risk management, self control and discipline than it is about figuring out complex trading secrets. I could write a profitable trading system on the back of a cocktail napkin but not 1 in 1000 people would be able to apply it.
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And that is it in a nutshell people.......

failed_trad3r · Nov 1, 2009

Quote from talontrading:

I'm not sure I agree with you on this one. I would say the skills required for effective model building differ from the skills required for trading. That's why almost all funds that hire physicists also hire traders to apply those models.

Some of those spectacularly brilliant people I knew who failed as traders were physicists or other scientists... I even had some of these guys build models that I was able to apply effectively, but when they were given some latitude to trade for themselves they screwed it up every time.

Trading is more about risk management, self control and discipline than it is about figuring out complex trading secrets. I could write a profitable trading system on the back of a cocktail napkin but not 1 in 1000 people would be able to apply it.
More...

If the system is good you don't need the discipline. You just execute the system. Discipline and psychology is overrated.

hopeful · Nov 1, 2009

Quote from talontrading:

I could write a profitable trading system on the back of a cocktail napkin but not 1 in 1000 people would be able to apply it.
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Please use this as a napkin. If it is truly a profitable system then I will run it through my backtesting machine and let you know if it works!

ashatet · Nov 1, 2009

Trading is not the same as investing. Trading is a trade or a business or a job, but investing is seeking return on the capital.

Index piker · Nov 1, 2009

Like I said before most of you would do better in absolute returns by adopting the tenets of a passive portfolio.

There is NO question as to the superiority of passive investing as a whole compared to active investing.

So once again if any of you are having difficulty, are newbies, or having second thoughts about the wisdom of trading you owe it to yourself to fully investigate passive investing.

It's just simple math as this excerpt by William F. Sharpe demonstrates:

"Active and Passive Investing

As you can see, the manger of an index fund doesn't have much to do. For this reason we call indexing "passive investing". The alternative is, not surprisingly, "active investing". Active investment managers don't want to buy all the stocks in a market, only the ones that they consider attractive. And since attractiveness changes as information and market prices change, this involves relatively frequent buying and selling -- hence the term "active".

Let's think a bit about the performance of active and passive strategies. Assume that you in this room constitute the entire universe of investors in the French stock market. About a fourth of you will be passive indexed investors, while the rest will be active investors. Collectively you hold all the stock on the French market. Now let's pick a time period -- say a year. And let's say the market as a whole returned 10.0% in that year. Before costs, what did each passive investor get? Exactly 10.0%. Obviously, before costs that average passively managed Euro returned exactly 10.0%.

What about the active investors? One might have made 15.1%, another 3.4%, yet another -23.0%, and so on. But what did the average actively managed Euro invested in the French stock market return before costs? The answer has to be exactly 10.0%. Why? Because the passive part returned 10.0% and the total market returned 10.0%. So the active part had to return the same.

We conclude then that in the French stock market the average actively managed Euro must have the same return before costs as the average passively managed Euro.

But before-cost returns aren't what matters. You don't eat before-cost returns. What you eat depends on returns after costs and, for that matter, after taxes. So let's consider costs and taxes.

The people running index funds are dull but they are cheap. They only need to know the names of securities in a market and the number of shares outstanding. You would not want to be stuck at a cocktail party with one of them. But their costs are minimal. Depending on the market replicated, the cost of managing an index fund should be somewhere between 0.15% and 0.50%, or 15 to 50 "basis points", using financial jargon.

Active managers are very different. They do research on companies, try to untangle the web that corporate officers and accountants sometimes weave, try to predict acceptance of future products, and so on. Their security analysts and portfolio managers are smart, well educated, and fascinating conversationalists at cocktail parties or anywhere else. But they and their activities are expensive. Their costs are likely to be at least 1.0% (100 basis points) higher than those of passive managers in the same markets.

Worse yet, the very activity that these managers undertake adds to costs. Brokers have to eat too, and many active stock funds sell stocks within 6 to 12 months after they buy them.

This is not all. Taxable investors have yet another reason to worry about active management. It generates realized capital gains far more frequently than does passive management. This requires the payment of taxes that could otherwise be either deferred or, in some cases, avoided entirely.

The bottom line is that after costs, the average actively managed Euro (or dollar, or yen) must underperform the average passively managed Euro (or dollar, or yen) in a market. This is simple arithmetic. And this is the basis for the assertion that indexed investing provides a way for you to beat the average investor in a selected market.

How big is the advantage for this approach? It depends on the index fund and the expenses of the active managers. "
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http://www.stanford.edu/~wfsharpe/art/talks/indexed_investing.htm

http://www.bogleheads.org/forum/viewtopic.php?t=173&sid=2814cbbef43c301687b3a30f89684d4b

http://www.bogleheads.org/forum/viewtopic.php?t=144

Of course the retort of the true believers is going to be but " We are All SPECIAL".

"We have skills"

Of course that is complete bunk,(you don't have magical skills that your competitors don't have also) even the professional mutual and hedge fund managers are subjected to the same mathematical constraints as above.

They on average do not consistently outperform their market and let's be honest neither do you.

The managers make money because they manage gullible people's money, not because they demonstrate superior skill in general.

If you are truly generating consistent alfa year in and year out beating the pro's why are you not joining their ranks?

Hint:You and I both know the real answer to that one.

indexer · Nov 1, 2009

By automated, I meant no trader involved.

Of course there are semi-discretionary traders who take signals from a system and execute them.

Quote from talontrading:

I'm not sure I agree with you on this one. I would say the skills required for effective model building differ from the skills required for trading. That's why almost all funds that hire physicists also hire traders to apply those models.

Some of those spectacularly brilliant people I knew who failed as traders were physicists or other scientists... I even had some of these guys build models that I was able to apply effectively, but when they were given some latitude to trade for themselves they screwed it up every time.

Trading is more about risk management, self control and discipline than it is about figuring out complex trading secrets. I could write a profitable trading system on the back of a cocktail napkin but not 1 in 1000 people would be able to apply it.
More...

Index piker · Nov 1, 2009

Quote from ashatet:

Trading is not the same as investing. Trading is a trade or a business or a job, but investing is seeking return on the capital.
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That's true only insofar as a trader may manage another persons funds for a fee and thus be profitable.

It has no bearing on the % return from market activity.