Can all traders be successful traders?

[JTrader]

On many occasions I have read things like '90% of day traders fail' and 'for every winning trade, there's a losing trade on the other side.'

From this I would assume that the odds of survival/success are firmly stacked against day traders.

However, the aim of a trader is not not to make any losing trades, but basically to ensure that gross profits exceed gross losses.

We will all make losing trades at different times, in our chosen markets, as part of our daily routines.

If all traders were to use a trading system that ensures greater profits than losses - and stick to it, is it fair to assume that all traders can be profitable/successful and make a living from trading?

Cheers

jtrader

 

[harryp]

If 5 guys sit down to play poker can they all win ?

 

[Trader333]

jtrader,

If all traders were to use a trading system that ensures greater profits than losses - and stick to it, is it fair to assume that all traders can be profitable/successful and make a living from trading?

Success in trading comes from people having different views on the same instrument. If they all have the same view then it cannot work. Also if they all use the same system that was previously profitable then it will fail to work from the point at which everyone used it.

As harryp has already said, if you have a pot of money that is made up on contributions from all participants, as soon as one person is in profit then someone (or several others) will have to be in a loss situation. The only way that this is not applicable is in stock trading if the stock continues to go higher in price forever. In futures trading which is a less than zero sum game (after broker commissions) one persons gain will always result in another persons loss regardless of system used.


Paul

 

[blackcab]

In a zero sum game, players with a probabilistic edge will rise and those without will fall. See Internet chess and backgammon servers that apply an ELO-style rating system to see that ratings distribute players by ability over time around the nominal average, even though all players win and lose individual games.

As I understand it, some trading is zero sum and some isn't - I think futures is zero sum and share dealing is not (in the sense that there don't have to be any immediate losers during a long bull run, say).

 

[darrenf]

If 5 guys sit down to play poker can they all win ?

But how about if the 5 guys are all playing to their own rules and each one doesn't know if the others are winning or losing playing by THEIR OWN rules. Can't happen in poker obviously as the rules are fixed but in trading?

Take timescale as an example:-

Trader 1 is a scalper and trades 1 minute bars. The market opens sharply up and he/she decides to look for a reversal and go short to play the gap as evidence shows that gaps often close. He is successful and gains 10 points/ pips/ cents profit.

Trader 2 is an intraday position player, looking to catch the main trend of the day. He she trades using 15 min bars. He she buys on the open, a sharp upmove which according to their rules suggests a good chance of the main trend being up for the day. After an intial correction, (gap closing), the market takes off northwards again. Trader 2 holds until the close and takes 60 points profit.

Trader 3 is a swing trader, looking to catch larger moves over the course of a few days. Trader 3 is short from 2 days ago and has a stop at b/e. Today the market opens sharply up and continues modestly upwards for the day. However, the stop is not hit and as trader 3 has a profit target of 200 points, leaves the trade open at the end of the day as today is a correction in an established longer term downtrend. The next day, the market continues to fall and hits trader 3's profit target.

All these traders have been successful on this occasion, trading the same market but over different timescales and using their own rules. Each one if they have a valid method can be successful over the long term.

Clearly, each trader will lose sometimes, and their money will be taken by other traders.

Also, clearly, all market participants can not be profitable over the long term. However, all traders that have a valid trading method and be able to stick to their own rules, (and be flexible in adopting new rules when old rules start to be less effective), can be effective over the long term.

The difficulty therefore comes in a) finding a valid trading method and b) trading it to the rules.

 

[minx]

But how about if the 5 guys are all playing to their own rules and each one doesn't know if the others are winning or losing playing by THEIR OWN rules. Can't happen in poker obviously as the rules are fixed but in trading?

All these traders have been successful on this occasion, trading the same market but over different timescales and using their own rules. Each one if they have a valid method can be successful over the long term.

Yeah but at the end of a 1 year/ 2 year/ 3 year period who will have shed money and who will have accumulated money, the money-go-round cant make them all rich as overtime they have to take from the others in order to accumulate wealth (futures mkt here).

 

[darrenf]

Yeah but at the end of a 1 year/ 2 year/ 3 year period who will have shed money and who will have accumulated money, the money-go-round cant make them all rich as overtime they have to take from the others in order to accumulate wealth (futures mkt here).

Thats my point. Clearly all traders can't make money over the longer term.

Those that do will have a valid trading trading method, with rules that they have personally chosen, and they will stick to the rules.

Our 5 guys can all make money if they fall in to this category as there will be 95 others that don't.

Also, what I am trying to say is that there is more that one way to skin a cat, or make money in the financial markets. There are probably infinite combinations of rules you can come up with which could be a valid trading method over a specific timescale.

 

[Atlantic Drifter]

If we make an assumption that the economy is constantly growing, at least on a time a averaged basis, then surely the total pot of mony is growing. I suppose one piece of evidence for this would have to be that distributions such as dividends outweigh calls such as rights issues etc. It must be theoretically possible then, for everyone to be profitable, because it cannot be a zero sum game over the long run.

Of course, this doesn't mean that there are good chances of it actually happening

best regards
AD

 

[jj777]

Skills Competence in Trading

jtrader[/QUOTE]

Hi Jtrader-

You ask "If all traders were to use a trading system that ensures greater profits than losses - and stick to it, is it fair to assume that all traders can be profitable/successful and make a living from trading?"


Yes and no. We all know that the markets are driven by the need to make profits short or long. The little research that exists in Cognitive Psychology suggests that losers are influenced by the bias called The Sunk Cost Error. We are also influenced by the Confirmation Bias, making us continue in an incorrect course of action. These are traps that occur in every day life as well as in trading. Traders rarely use a robust and efficacious model of the skills required to achieve competence. When one trains in medicine,law.etc., the model is clearly developed and the learning is structured in such a way that you build upon skills as you study further.

Trading is an anomaly in that anyone can pretend to have knowledge and some gurus exploit this to their own selfish advantage. There are "experts" in trading psychology who hold no qualifications at all, let alone a degree in psychology. Traders are inclined to follow psychobabble because it is easier to work with stereotypes than learn a rigorous methodology. It is easier to have fun by making up parables and allegories because the creators don’t have the knowledge to develop robust ideas that can be tested against a base line. Dealers and Brokers have been shown to make up stories to fit the facts. It is a salutary and frightening fact that you need only to study for 40 hours to become an FSA “approved person”.

So my suggestion is “yes” everyone with average intelligence can become a successful trader in the same way that all the average population can pass GCSEs. And “no” not everyone passes GCSEs nor become successful traders because they fail to identify what needs to be learned and if knowing what to learn, will self sabotage by avoiding to study the most difficult subjects (and other self sabotaging behaviours) . This of course is a very narrow answer to a huge area. My apologies for keeping it brief and missing a number of important points but I must return to study and the screens.

Hope this helps. I am back to monitoring a trade and studying now ;-)

Jj777

On many occasions I have read things like '90% of day traders fail' and 'for every winning trade, there's a losing trade on the other side.'

From this I would assume that the odds of survival/success are firmly stacked against day traders.

However, the aim of a trader is not not to make any losing trades, but basically to ensure that gross profits exceed gross losses.

We will all make losing trades at different times, in our chosen markets, as part of our daily routines.

If all traders were to use a trading system that ensures greater profits than losses - and stick to it, is it fair to assume that all traders can be profitable/successful and make a living from trading?

Cheers

jtrader

 

[MysticalTrader]

A first class post, thanks. Some very good points raised, not all of which will be universally popular but which are nevertheless true and well made. You rang a couple of psychological bells :-(

MT

ps any significance to the 777?

jtrader

Hi Jtrader-

You ask "If all traders were to use a trading system that ensures greater profits than losses - and stick to it, is it fair to assume that all traders can be profitable/successful and make a living from trading?"


Yes and no. We all know that the markets are driven by the need to make profits short or long. The little research that exists in Cognitive Psychology suggests that losers are influenced by the bias called The Sunk Cost Error. We are also influenced by the Confirmation Bias, making us continue in an incorrect course of action. These are traps that occur in every day life as well as in trading. Traders rarely use a robust and efficacious model of the skills required to achieve competence. When one trains in medicine,law.etc., the model is clearly developed and the learning is structured in such a way that you build upon skills as you study further.

Trading is an anomaly in that anyone can pretend to have knowledge and some gurus exploit this to their own selfish advantage. There are "experts" in trading psychology who hold no qualifications at all, let alone a degree in psychology. Traders are inclined to follow psychobabble because it is easier to work with stereotypes than learn a rigorous methodology. It is easier to have fun by making up parables and allegories because the creators don’t have the knowledge to develop robust ideas that can be tested against a base line. Dealers and Brokers have been shown to make up stories to fit the facts. It is a salutary and frightening fact that you need only to study for 40 hours to become an FSA “approved person”.

So my suggestion is “yes” everyone with average intelligence can become a successful trader in the same way that all the average population can pass GCSEs. And “no” not everyone passes GCSEs nor become successful traders because they fail to identify what needs to be learned and if knowing what to learn, will self sabotage by avoiding to study the most difficult subjects (and other self sabotaging behaviours) . This of course is a very narrow answer to a huge area. My apologies for keeping it brief and missing a number of important points but I must return to study and the screens.

Hope this helps. I am back to monitoring a trade and studying now ;-)

Jj777[/QUOTE]

 

[barjon]

Atlantic Drifter makes a good point.

If you're trading futures it's a zero sum game (or less as T333 said) and you're competing only with other traders (and God help most of you (us) against the bigboys in the long term)

If you're trading shares you're competing with the overall money flow in and out of the market (and your chosen share) as well as with other traders. Thus it's not a zero sum game and it is possible for everyone to profit.

Is that right Trader 333 ( I think I asked you a similar question before but I've forgotten your answer!!!!!)

 

[sidinuk]

Remember that it is not just speculators that trade futures, you also have those that wish to hedge a particular risk.

The point of futures markets is the transference of risk from a party that doesn't want it (ie a farmer using corn futures) to someone who does (a speculator). The speculator's reward for taking on the risk is profit. Speculators wouldn't trade a market if the profit did not outweigh the risk required to earn it.

There is one other group of participants and that is unsuccessful speculators, ie those that have no system, enough capital etc.

The speculators provide the liquidity required for the market to operate satisfactorily for the hedgers, to enable them to buy/sell whenever they need to.

So the hedgers might lose in the futures market but that lose would be offset against gains made in the underlying product.
Speculators might win or lose depending on how good they are, in reality only a few will survive long enough to make a profit.

In theory all speculators/traders could win by operating efficient market making techniques. So the hedgers effectively pay a premium, ie the spread , to the market makers (the traders). Everybody is a winner because the hedgers get a liquid market to hedge in and the speculators make a profit commensurate with the risk that they take.

 

[donaldduke]

There are investors who are investing for the long term, billions are invested by pension funds every
month regardless in the market is going up or down. And if they markets dont go up in any year this
money is flowing to other market users (eg speculators).

In Futures markets there are also hedgers, who are interested in gaining certainity in futures prices not
primarily making a profit on that hedging trade.

If you are buying goods from abroad then you might be using the FX markets and probably arent timing
your entry like a trader is.

So the guy taking the other side of the your trade may not be a speculator. If there are enough of
these other types of market users then perhaps every speculator could be profitable, but i dont know what
the breakdown of market users is.

 

[stevet]

all traders are successful at trading - thats why they are called traders

learners and losers are not traders and wont be until they turn the corner and have at a year or so successful trading behind them

p.s there are a lot of losers trading for mutual funds and pension funds! but hey - its not their money - and they still get their fat pay cheques - so they are losers at trading for others - but real good at converting bull **** into cash for themselves

 

[darrenf]

all traders are successful at trading - thats why they are called traders

learners and losers are not traders and wont be until they turn the corner and have at a year or so successful trading behind them

p.s there are a lot of losers trading for mutual funds and pension funds! but hey - its not their money - and they still get their fat pay cheques - so they are losers at trading for others - but real good at converting bull **** into cash for themselves

Well, by definition, mutual funds and pension fund managers are not traders, not conventional funds anyway. (Some hedge funds will attract pension funds etc and I would class this as trading).

The conventional mutual and pension fund managers are long term buy and hold investors. I would not class this as trading at all. The fund objectives are generally to outperform a given index or average and most of them are very similar in terms of major holdings/ asset split etc. (most don't even manage that on a consistent basis it has to be said)

Compare that to a hedge fund or individual traders objective of making an absolute return however large or small and they are entirely different approaches.

Having said that, yes mutual/pension fund managers always get paid, due to the fact that the funds are so huge that the annual managment charge of 1% or so makes plenty of profit for the institutions running them and hefty pay cheques for those "managing" them.

 

[JTrader]

If you're trading futures it's a zero sum game (or less as T333 said) and you're competing only with other traders (and God help most of you (us) against the bigboys in the long term)

If you're trading shares you're competing with the overall money flow in and out of the market (and your chosen share) as well as with other traders. Thus it's not a zero sum game and it is possible for everyone to profit.

Hi

just a couple of questions.

What is a zero sum game and why are futures a zero sum game?

If with share trading it is possible for everyone to profit.............what about when trading with a marketmaker such as a spreadbet company or a forex dealer? how does this compare to futures and shares?

Thanks

jtrader.

 

[stevet]

darrenf

historically your view had been the accepted wisdom

but things have changed

the ability to buy and sell over a period of time is trading - albeit you might want to add a period of time to differentiate the type of trader from intra-day to longer time frames

the reality was that the real definiton of buy and hold - was - i really dont have a clue and how can i when i only do a few trades now and then - so i will buy now so i look as though I am doing something, but i wll have left the job and gone to a new fund before the xxxx hits the fan

there can only be absolute return trading - by logic - the alternative is a loss!

the fact is that the key business models of these funds etc is to make money from the monies coming in, and for whatever reason - they have discovered that no matter what they do wrong - people tend to leave the bucks in and even more comes in - so you cant blame them for taking people for a ride - if they did not work for the funds - they would only be qualified to get a job sweeping up somewhere

 

[Trader333]

jtrader,

What is a zero sum game and why are futures a zero sum game?

In futures for you or anyone to take a "Long" position then someone has to take the opposite side of your trade and take a "Short" position. If one of you is in profit then the other has to be in loss. This means that there is no value added to the transaction, ie you cannot both come out with a profit and so it is called a zero sum activity because you cannot have more in the pot of money than has been put in to start with.

Compare this to making a simple product such as a wooden chair. The raw materials are worked on and when the chair is finally made then the value of those raw materials has now got added value. So this is not a zero sum game because all the people involved can take a profit and the end product is worth a lot more than the raw materials that were there to start with.

Although it is theoretically possible for trading in shares to not be a zero sum game, in reality it has been because we have seen markets crash on several occasions. It would require an endless upward move in the stock indices where stock prices keep getting higher and higher. However, this also relies on an ever increasing population and at some point that will cease. It is a little like the pyramid schemes you hear about where for you to make money you have to recruit others and at some point you just run out of people.


Paul

 

[barjon]

jtrader,




Although it is theoretically possible for trading in shares to not be a zero sum game, in reality it has been because we have seen markets crash on several occasions. It would require an endless upward move in the stock indices where stock prices keep getting higher and higher. However, this also relies on an ever increasing population and at some point that will cease. It is a little like the pyramid schemes you hear about where for you to make money you have to recruit others and at some point you just run out of people.


Paul

Paul,

Not sure I agree with that. We may have had crashes but they have only been severe reactions to the long term up trend - after all the DOW stood at less than 1000 only 30 or so years ago. The steadily increasing money flow into the market over the long term comes as much, if not more, from economic growth and increasing prosperity than from an increasing population. You might eventually run out of people, but I doubt you will run out of economic growth whilst that remains a primary focus of governments around the world even if they do stumble from time to time.

jon.

 

[Trader333]

Barjon,

I take your point, however the whole US based economic model requires increasing population which in turn gives economic growth. The issue of whether everyone can make money trading stocks appears to be flawed by the lack of people that have managed to do so on a consistent basis which is what the original discussion was about.


Paul