You won't get rich daytrading - my story

Discussion in 'Trading' started by tradermike, Jul 14, 2001.

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  1. Vinigar:
    "Why do most fail and lose a lot of money. Sure you can generate a laundry list: Use stops, money management, risk/reward and on and on and on! Sure you can debate between long term, short term, swing trade, daytrade.
    But, what is the real answer? "

    This is my attempt to answer:

    Psychological Aspects of Trading

    I have recently been reading a study by Terrance Odean, an assistant professor at the University of California.

    Odean received the trading history of over 60,000 accounts that where active been 1991 and 1996 from a discount broker and used the data to study the trading behaviors of online investors. Not surprisingly, most of them underperformed the stock market and only a small minority beat the market. In fact only half of active traders managed to just break even. Most simply made little or lost a little. Only a small minority produced outstanding returns(the top 5% had an average return over 2.41% a month and only 1% had a return over 4.86% a month. Professional investors do not fare all that much better as half of all mutual funds fail to beat the S&P 500 index every year.

    The failure rate of investors and traders is a different picture than that which is portrayed by online and traditional brokers through their advertisements. In fact if most people actually lose money in the stock market, then the market is more like a pyramid scheme in which wealth is simply transferred from the mass and given to the brokers, stock manipulators, market makers, and a small super trading elite at the top than the get rich fantasy that is so often presented. A view that some might find romantic would picture it as a pure Darwinian survival of the fittest and leave out the part about the manipulators. One would need more data to confirm if either of these views are true. A study on how many trading accounts are opened and closed would prove or disprove this. If brokers must continually recruit new accounts to replace ones closed due to losses than these two pictures of the market are correct. Money earned outside of the market is brought into it and given to professionals and manipulators. Just like a ponzi scheme, more money has to be recruited to keep the engine running. For a pyramid to continue new blocks must be placed on it. No matter how the market is structured, what is more interesting is trying to figure out why it is that many people lose money and a few make a lot of money in the stock market. What can we learn from that to increase our own returns?



    How do most people lose money? Odean’s trading data shows that almost all individual investors generate poor returns by selling winning stocks too soon and holding on to losers. He argues that they do this because they are "overconfident." They consistently believe that their losers will come back and the market ends up proving them wrong. When they have a winner they sell them too soon, fearing that it will become another loser.

    Odean’s study provides a great resource about the behaviors of active investors. However, any conclusions about motivations that can be drawn from the data are merely theoretical and cannot be proven. This isn’t his fault, its simply the nature of proof and evidence. There is no way one can extrapolate the motivations of thousands of individuals by studying number data and one doesn’t have the resources to ask all of these people about their motivations. One can only manufacture logical explanations from the data.

    This isn’t a bad thing. You can learn a lot by thinking in that manner. My guess is that people do not lose money in the markets because they are stupid or because they aren’t pros. Remember that most mutual funds also underperform the stock market. I believe the primary difference between winners and losers is psychological. Winners and losers are presented with the same set of information, however the winners take different actions. What guides their actions? From my own history of losing and then making a lot of money in the stock market and study of general and trading psychology I’ll try to come up with some explanations. I believe that the actions of losing traders are guided by fantasy and a fear of losing while winning traders are guided by confidence. Without the proper mindset and attitude you cannot make money in the stock market. It’s not a guarantee to being successful, but it’s a prerequisite. However, the stock market is an environment that makes it difficult for most people to obtain this proper mindset, let alone maintain it.

    environment -> senses -> beliefs -> identification -> motivation -> actions

    The human mind gathers information about the outside world through the uses of it’s senses. It recognizes the information and then processes it. It then identifies it and responds to it with a whole host of beliefs, unconscious and subconscious. Based upon a person’s motivations and interpretations of what is taking place he carries out an action. The key is that actions that people take are based upon their own set of associations with what is going on in the world outside of them. These associations are based upon past experiences and a person’s beliefs about himself and the task at hand. The world consists of inputs that make people feel and they respond.

    To relate this to trading, winning traders and losing traders experience the trading environment differently. It makes them feel different and as a result their actions consistently vary. In pyschological terms, they interpret the market differently because they have a separate belief system in the way that they see themselves relative to the stock market.

    Let’s list these beliefs and actions below:

    Belief statements that different traders can make:

    Winning Traders

    The markets provide an opportunity

    The markets exist to give me profits

    If I get stopped out then I have to reevaluate the trade

    If the market doesn’t do what I expect then I must reconsider

    I’ll take one trade at a time.

    I don’t have to be perfect, I just have to do my best.

    Money is not that important

    Losing is part of the process of making money

    Trading is a game, I know I can win

    Every setback provides me with new market information

    I can wait for an opportunity to come


    Losing Traders

    I must be in the market now

    If I lose on this trade I am a loser

    If I wait for my trading rules I’ll miss out

    If I get stopped out I have bad luck

    I can’t lose money

    The market makers got me again

    I’m an idiot, how could I lose money

    What will they think when I tell them I lost money on this one?

    The stock market is rigged

    It’s impossible to get a good fill

    I cannot take a loss

    If I take my profit then I am right

    These different beliefs create different characteristics of winning and losing traders:

    Winners:

    Get pleasure from trading the market as an end in itself

    Not motivated primarily by money

    Confident that they can make money in the market

    Not afraid to take a loss

    Patient - waits for opportunities

    Uses a highly planned strategy

    Is well prepared, done his homework

    Measures the risk/reward ratio of every trade



    Losing Traders:

    Never define a loss

    Locked into a narrow belief system

    Hesitate to make a trade

    Do not stick to a system

    Trade by whim

    Trade by emotion

    Have no consistent strategy

    Do not practice risk management

    more interested in proving themselves right then being a success



    Financial markets are structured in such a way that make it very difficult for someone to approach them with a confident psyche; and that is why it is so difficult for most people to make money trading them. Almost all environments - the workplace, family, friends - provide external forces that limit a person’s behavior. They provide a set of rules of what is right and wrong and what actions are to be rewarded or punished. This is not true for the stock market.

    The stock market does not care if you make or lose money. The market has no control over you. Since the market does not exert any external control over your actions you have to fashion your own system of rules and have the discipline to obey them in order to be successful. No one else will do it for you. You have to have the confidence to take this responsibility yourself. It takes enormous self control and discipline.

    Most people cannot take this approach. Instead they construct a fantasy in which the market provides them with future riches. They transplant these fantasies on to the individual stocks that they purchase and have difficulty confronting the reality of being wrong. When events don’t match their illusions they simply ignore them. If a stock they bought drops below their purchase price they refuse to reject the fantasy that their decision to purchase the stock will make them money and instead convince themselves that it is a winner that merely isn’t in favor yet.

    However, stocks do not make successful traders money. They do it themselves. Instead of believing in the power of stocks, they believe in the viability of their own trading strategy. They have faith that their own disciplined interaction with the stock market will make them money and not the other way around. The decision making freedom the stock market gives ruins most active investors, but handsomely rewards the few prudent traders.

    As I said earlier it takes extreme confidence to execute a well planned trading strategy and most people cannot find it. Instead, they often experience intense anxiety in the market. They may come to believe that the markets are rigged against them. The market doesn’t cause this. It’s their lack of strategy that twists them into emotional knots.

    What one has to do to move from a fear stricken psyche to one capable of building enough confidence to make money in the market is to first believe in oneself and develop a strategy that consists of strict money management techniques. I’ll discuss how I have done this later. But, once you have a strategy in place you have to have the fortitude to continue to believe in it when you suffer losing trades. Losses are a part of the game. The way to make money is to accept them and to use money management techniques to keep your winners larger than your losers.

    You have to move away from a mindset that stocks will make you rich and believe that your trading method will make you money. Then you must come to realize and hold the belief that being right or wrong on each individual trade does not matter. You have to be able to move through the adversity of losing trades and hold the faith that you will make money in the long run. This is why people find it so difficult. People focus too much on the individual trades and hold unrealistic fantasies about them, while they cannot take responsibility for the decisions that go wrong. The worst ones take it personally. Most never understand what is required to succeed.

    The bad news in all of this is that if you are trying to generate large percentage returns on your account the odds are stacked against you. The odds of someone starting small and making a lot of money in the stock market are probably the equivalent of a rookie league baseball player making it into the big leagues. The good news is that most people trade recklessly, on pure emotions, and with little or no strategy so the competition isn’t so hot. Dedication and following a sound strategy can go a long way. I try to demonstrate that and encourage you in that direction with this newsletter and website.

    To read the Odean study yourself click this link. Take a look at page 19.

    http://www.gsm.ucdavis.edu/~odean/papers/returns/returns.html


     
    #41     Jul 15, 2001
  2. Gotta hand it to you, tradermike. You've certainly remained civil under some pretty heavy character attacks. Whether I agree with you or not I like to hear different opinions.
     
    #42     Jul 15, 2001
  3. spud

    spud

    It's funny, but what most people on this thread are complaining about is what I've already brought up in a previous thread on hyping. Let's face it, this site
    is going to be a yahoo equivelant soon enough. Believe me,
    Im the first one who wants to see this thread with only legitamate traders, not sales guys. I personally think its getting so bad that sales guys are selling to sales guys. I know three traders over the last six years whom make six figure incomes each month, and they refuse to read this site anymore as it's become so generic. As far as I'm concerned guys whom claim their traders and post 400 x are just a bunch of hypsters. The very best trader I know post once a month if that; why, who's got that kind of time!!!!!!
    Let's clean this quality site up, stop the advertisments!! And please see what some of the senior members are trying to accomplish and that is legitamacy, of which, if you take them up on it I personally know they don't have. Some do but the sales guys stick out like soar thumbs!!!!
     
    #43     Jul 15, 2001
  4. "Just so happens I was too busy to read tradermike's original long post and did a screen-shot with the intention of reading later. As sniper_trader and qwik have pointed out, he was in fact hyping his website and claiming that it was free. And not only did he never admit to the re-editing, but on pg. 4 he falsely said: "

    This is insanity. Your statement that I never admitted that I rededited the tagline makes it sound like I have been disengenious or am untruthful. This is wrong.

    I changed the tagline because people were complaining that I had the website address on it so I took it off and put my email address on it. No one asked me a question directly about it afterwards so there was nothing that I was trying to hide or decieve anyone about with my changing of the tagline. Find one statement where I mislead someone about why I changed the tagline. You can't - but you imply that in message. I find it amazing that people engage in personal attacks instead of trying to deal with the content of my post. It shows the automatic defensive reflexes that jump into motion in some of your nervous systems when you saw what I said about the difficulty of daytrading.

    I'm new to this site so there are either one or two things happening. I am not sure which:

    1)people don't want to hear that daytrading is difficult or even think about that so attack anyone who says that
    2)this site is pretty much a small little club and anyone outside the club is branded a liar or accused of trying to take people's money. No benefit of the doubt is given.
     
    #44     Jul 15, 2001
  5. Babak

    Babak

    Spud,

    I along with you want to maintain and increase the calibre of dialogue in this forum. However, I think we must think positively rather than negative.

    If someone posts a 'pitch' we can all simply ignore it and leave it to drift into the bottom of the board never to be seen again (or better yet erased by admin)

    Having said that, I truly believe that it is not fair to ignore TraderMike's long message that contained many interesting and valid questions and concentrate on less than 1% of his post, where he originally mentioned his website.

    Again, I humbly submit to all this suggestion. Rather than flaming a post you believe to be a simple sales pitch, simply ignore it and let it be replaced by posts that are valuable.

     
    #45     Jul 15, 2001
  6. "I guess I have too much free time on my hands. I guess the "Old-Fart" (me) has no life "

    If you are like me than you spend time during the day typing on message boards just to pass the time sometimes.
     
    #46     Jul 15, 2001
  7. tymjr

    tymjr

    I've read a lot of debate over what style is best or more profitable on this forum. I've heard that same shit for years. I've engaged in it, too. But I've been around long enough, now, to have worked with or had contact with enough traders with radically different styles that I firmly support Hitman's statement, "it comes down to your personality and whatever is the best for you."

    In the beginning, I think there are some fundamentals that will keep the "rubber side down", but after that you are on your own to devise or adopt a system that fits you. It can be as unique as you are. That’s not to say I think there should be no discussion, I just hope newer traders do not close themselves off to the many different trading possibilities by being overly influenced by anyone’s opinion, including my own. Including this one. :)
     
    #47     Jul 15, 2001
  8. Hitman

    Hitman

    TradeMike:

    I DO agree that individual day traders top out at a few millions a year, but personally I would take that any day. You mentioned many hedge fund guys but most hedge fund guys I know are heavily into derivatives (Soros also did currencies), and I don't think it is a fair match between swing trading and day trading.

    I have always thought of day trading as something that generates income instead of capital compounding, I mean at my firm the only stat that matters is how much money did you make today, not %.

    There are 2 techniques I enjoy in day trading that swing trading has no equivalent for:

    1) Tape/L2 reading, if your time frame is longer, this is useless, you look at the volume bar or money flow on your candle charts and that's it. The fun in day trading comes when you are reading the specialist and try to understand he is doing. Because the time frame is much shorter, this allows higher percentage shots than chart alone.

    2) Open/Close, for a swing trader, the chart is continuously running, for a day trader, it begins drawing at open and finishes at close. There are so many tricks to playing those two periods, and none of which is a part of a swing trader's game.

    I am very impatient with positions. When I get into something it has to move right away, as I believe a static position is a 50/50 position, not the type of trade I want to be in. I get in and out of positions very aggressively, I cut losses fast but on the other hand I have trouble holding through pullbacks/wiggles, all of this makes me better suited for day trading than swing trading.

    I do admit when I swing traded I didn't have nearly as much experience as I do now. I have considered starting an overnight account with IB since I am not trading firm's capital so my own capital is safely stashed away, may as well make use of it. But I know very few people can be successful at both and I am afraid it may impact my day trading game. I may start a paper trading portfolio and see if I can somehow convert my day trading strategies over to swing trading.

    BTW, I wear contact lens and I am shortsighted, I think that's why I prefer day trading over swing trading :)

    SniperTrader:

    I am sorry, I think I was too harsh on Jay and I shouldn't have called him a fraud (then again I am not going to edit my original comment just in case you CTRL + PRTSed it).

    He is a cool guy and I bought his book, I used to love it until I tried the techniques when I started at WorldCo, I had a hard time doing those stochastic scalps because the market lost a lot of the trading range that it used to have. Then I got the trial service, and half of his calls worked, half of his calls didn't, yet if you look on his daily recap just about everything worked! A few fellow trader friends also had a similar issue with his calls. I did like his market commentary especially on overall market direction, but in the end, it is just another trading room. Your experience may differ, but I started making money AFTER I gave up on Jay's strategies. I have no right to call him a fraud, but I think for the most part he is a product of the 99/00 volatility.

    Of course, this has to do with the talents I worked with at my firm, it kind of spoiled me. It is just that I can't imagine why would any great trader sell a subscription when they should be trading. Jay doesn't trade, that bothers me.
     
    #48     Jul 15, 2001
  9. Six Good Reasons to Flame this Thread

    • Tradermike sells a newsletter which he referred to as "free" (which it is not) in his first post. When questioned, he edited his post and claimed that he had not even mentioned it.
    • This message board is about traders sharing ideas to help and encourage one another to become better traders. The theme of this thread is the erronous idea that becoming a daytrader is almost impossible. Obviously this is a conflict of purpose.
    • The initial post on this thread refers to daytrading as a "mental illness".
    • The person making these allegations about daytrading is not an accomplished trader himself, in fact, he is an admitted failure. Think about it, if you want to become a doctor, do you go out and ask someone who flunked out of medical school?
    • Many newer/aspiring traders read this board. It is important not to let one self serving poster lure them away from their dreams only because no one took the time to challenge the incorrect assertations.
    • If one person is allowed to hype his service unchallenged under the guise of "wanting others to relate to his story", this board will soon be full of threads just like this one.

    There have been some good discussions on this thread about money management, position sizing and the risks associated with margin. I am certainly not against the discussion of these ideas. What i dont like is the broad brush that has been used to paint my profession by someone whose only purpose is to sell newsletter subscriptions. TraderMike has not asked for help to become a better trader. He has not offered a single new idea that will benefit traders reading this thread. He has simply proclaimed what he thinks are the evils of daytrading and tried to convince those who would listen why his investing idea is better. Perhaps this is harsh but i feel there are some very good reasons to flame this thread. If no one tends the garden of ideas, weeds of hype will soon overtake it.


    -qwik
     
    #49     Jul 15, 2001
  10. Okay, I will take first action in the direction of flaming this thread. I will delete all my posts.

    Bill
     
    #50     Jul 15, 2001
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