Trading is a competitive endeavor, your winning or losing is predicated on your relative skills to other traders. This may be explained by a hypothetical scenario. Let's say every trader in the market has unequal but near perfect edge and near perfect money management skill, and near perfect psychological maturity, i.e. every one is a Paul Tudor Jones a like. My hypothesis is that you would still have 95% losers and 5% winners.
I quite agree : on the trading side, people lose money because they don't know what they're doing But people also lose money because the SEC do not do their job to make sure we trade in fair markets The SEC allows too many companies to go public, whereas many IPOs are a way to rip off shareholders One example would be the Virgin Mobile USA IPO. The stock goes down and after a few months, shares are bought 50% lower. They are countless examples like this.
Because 95% (or maybe more) of the retail traders often attempt to predict the market, when it clearly isn't predictable. You only have an "edge" when you don't need to BET on what the market will do in the next few mins, hours or days to make money consistently.
This is the hypothesis for perfect world, the side of the trader than has 5% better edge than other side will end up to be in the top 5% winning camp. Look at the roulette, house only have 3-4% edge (due to green/zero) but they will win more than 95% in long term. This is much more complicated in the real trading world, all the retail trader get into the market with less than 50% chance to win (due to commision and slippage paid to broker and market makers). This explain why 95% of them loss. I am sure someone will try to argue they have some edge to compensate those inherit disadvantaged by applying TA , but ask yourself honestly, when the price hit some "pivot" point, how do you know this is the reverse or real break up ? or it is just a head of the previous shoulder ? you are not any better than 50% chance to be right in either case.
Agreed. No one (repeat again - NO ONE even the most advanced HFT) can predict market in the next few mins, hours or days. Those claim they can do this based on some text book price pattern is not any better than reading the tea leaf or crystal ball.
This is definitely a major problem, especially for inexperienced traders who fade strong moves because price has gone too far and is "due" to reverse. For the few players who manage to define setups that have demonstrated a greater statistical chance of moving one direction rather than the other, a major cause of failure is the inability to stay focused and trade all these setups, resulting in an uncanny ability to choose more of the trades that fail and pass on many of the ones that would've reached or exceeded target. Add to this an overwhelming compulsion to exit winning trades before price hits a reasonable profit target level, yet to allow full stop losses to be hit on losing trades, and it truly is surprising that even 5% of retail traders are profitable.
Yea, but I'm pretty certain that most HFTs do not trade direction, most of them are just front running bots that are profiting from the spreads.