Probably Breaking Even???

[DionysusToast]

All

It's often said here (by me too) that if you trade at random with a co-equal stop and target, then you'll win 50% of the time & lose 50% of the time. Even if stop and target are different, that will just impact the win ratio but the result will still be break even.

It's also said that 95% of people lose. Now - these 95% of people that lose, they aren't just bleeding fees, they are losing capital.

So - what is the reason for this? If you don't know what you are doing, how can you lose more than half the time? How can you consistently do worse than random? Even if stop & target are different, the fact that your lack of knowledge makes your trading random, you should still break even.

First of all - I guess we'd better look at the 'random entry thing'...

Rule:
Enter at random on the ES with a market order & a 2 tick target & 2 tick stop.

Execution:
Bid = 1119.25, Offer 1119.50
Buy market - fill @ 1119.50.
Stop = 1119.00
Target = 1120.00

Now - the thing is, the tiny 1 tick spread on the ES has already put us at a disadvantage. We only need the market to tick down 1 tick and for a single trade to execute for us to stop out.

On the upside, we not only need the market to tick up 2 ticks but we also need for it to tick up and chew through enough contracts to be brought to get to our place in the queue. The way I trade, I don't think about it like that - I presume my target won't get filled until it moves through my target price.

So suddenly, you went from a 50/50 win/loss ratio to something else. You went from 2 tick stop and target to something else. A 1 tick down to stop you out and 3 ticks up to realistically get you filled on the upside.

Of course, one answer is to have larger stops & targets to dilute the impact of the spread. Still this is just an example of the in-built negative edge in the market.

Is this the only thing at play that causes people to lose so much money? Do other factors exist that cause thee 95% to lose so much instead of dicking around and breaking even?

What other factors are at play here? I'm talking about features of the market that causes newbies to do less than break even....

DT

 

[wackypete2]

Volatility.
Even a simple example like you have shown can be screwed up. Most traders can't stick to the rules for fear of losing. They almost always end up letting the losing trade get stopped out at the pre set level but end up taking only a small portion of the pre-set win level.

The greater the volatility the more pronounced this becomes because volatility and fear of losing are directly correlated. Watching a few trades that are in the black reverse and get stopped out makes even seasoned traders frustrated. Inexperienced traders try to compensate by taking smaller wins than the pre set level and that throws off the 50/50 ratio.

Peter

 

[wackypete2]

Just to add...if the markets moved in a nice smooth fashion then you'd have enough confidence to just leave the trade alone and play out as the rules dictate.

Peter

 

[DionysusToast]

So Peter - you are saying that the issue is the trader and there is nothing about the markets that cause these people to lose?

I used to think like that, the thing is, it's too convenient. I don't buy it any more.

If you were winning 50% of the time right from the start, why would you go to pieces in this way? What you outline would need to be present in the trader from the outset. I don't see why that would be the case.

Surely a new trader would have no baggage and if they effectively traded randomly, then they would gain no baggage as they would not suffer serious losses.

I think a lot of the answers lie in the markets. I tend to see psych issues as a cop-out.

 

[wackypete2]

I'm saying it's the volatility in the markets that cause a trader to deviate. See my 2nd post.

Peter

 

[wackypete2]

DT, I've watched good traders do dumb things when they have a few losses on the trot. That had very little to do with the market action.

Certainly market makers and large participants can move prices for while. If you put your stop loss where everyone else places theirs you get slaughtered.

Peter

 

[debrox]

Why would the markets be random?

 

[DionysusToast]

Why would the markets be random?

No-one is saying the markets are random.

What I am implying is that the markets may have multiple negative edges because newbies should effectively display the effects of random 'coin toss' trading.

I have outlined one negative edge.

Peter thinks it's a psych issue but I am not convinced...

Capiche?

 

[wackypete2]

No-one is saying the markets are random.

What I am implying is that the markets may have multiple negative edges because newbies should effectively display the effects of random 'coin toss' trading.

I have outlined one negative edge.

Peter thinks it's a psych issue but I am not convinced...

Capiche?

You don't believe that emotions work against a trader? You think that all traders, even total noobs, can just trade mechanically?

Besides, once again....I am saying it's the market volatility that causes a trader to deviate. You obviously are looking for a certain answer and you're trying to corral my words into the answer you wanted to hear.

Peter

 

[wackypete2]

Anyway, I'd love to continue, but it 11:30pm here and I can't keep my eyes open. Will catch up in the morning.

Peter

 

[DionysusToast]

You don't believe that emotions work against a trader? You think that all traders, even total noobs, can just trade mechanically?

Besides, once again....I am saying it's the market volatility that causes a trader to deviate. You obviously are looking for a certain answer and you're trying to corral my words into the answer you wanted to hear.

Peter

Maybe - but surely coin toss trading is break-even regardless of the volatility. You don't explain why volatility would quash a random system, which is what a newb would use without realizing it.

I don't see why it's an issue if a newb is effectively a coin to$$er. They'll theoretically win and lose and not garner much negative emotional capital.

 

[brettus]

Maybe - but surely coin toss trading is break-even regardless of the volatility. You don't explain why volatility would quash a random system, which is what a newb would use without realizing it.

I don't see why it's an issue if a newb is effectively a coin to$$er. They'll theoretically win and lose and not garner much negative emotional capital.

You're right in that a coin toss would result in the average trader becoming more profitable, but the reason why everyone loses is that they run out of money eventually. They also lose the spreads.

 

[Hotch]

IMHO:

The 95% aren't entering randomly, they're using logic, flawed logic. Buy rumour sell news isn't obvious to somebody who hasn't heard it before and thought it through. Sure there are a hundred other similar things.

If you truly did enter randomly (with fixed target/stop, random time etc etc), you would just bleed fees & "spread expectancy" (thing pointed out in the OP).

 

[the hare]

Markets over any time horizon are always going to have a bias, the same can be said for your random coin tosses. If the two coincide you'll get better than break even results, if the two are out of phase, the results will be much worse.

The other negative edge of course is if you lose 10%, you have to make back 11% to break even, 50% drawdown requires 100% gains to break even etc.

I trade random sytems for a living (for almost a decade now) and theres a great deal I could add, but unfortunately, these types of discussions are best left for a trading forum, not a zoo

 

[tommog]

Actually most short term/medium traders do lose through fees. Allow a tick in costs on every trade (combination of brokerage and bad fills) this is EXTREMELY conservative, and you do 10 trades a day, again conservative thats about $100 you are losing a day on 1 lots from your real how-well-i-call-the-market trading results. This is in futures with lightening fast connections and low trading costs.

Now assuming most people here spreadbet or trade FX you can double or triple those overheads.

 

[donaldduke]

What other factors are at play here? I'm talking about features of the market that causes newbies to do less than break even....

DT

Initially newbies chase the price. They see a big move (after watching CNBC say) and want to get in. They normally end up buying near the high or selling near the low.

After a while they think they can pick tops and bottoms, so they try counter trend trading instead..

Both of these strategies, in the hands of a Newbie, may well be worse than a random entry.

 

[timsk]

Maybe - but surely coin toss trading is break-even regardless of the volatility. You don't explain why volatility would quash a random system, which is what a newb would use without realizing it.

I don't see why it's an issue if a newb is effectively a coin to$$er. They'll theoretically win and lose and not garner much negative emotional capital.

DT,
I agree with wacypete2.

Your comments might apply to a newbie who trades mechanically, but most don't. Most are discretionary traders and, as soon as they see price moving in their favour - or against them - fear and greed kick in, their heart rate quickens, sweaty palms ensue, and an emotive response is induced - usually one that's not in the best interests of their bottom line. Volatility is one of the main tools that the market uses to induce this response. I continually change the periodicity of my charts to adapt to the changing volatility throughout the day. If I get it wrong - and I often do - I have a losing trade.

As an aside, I've found that the handful of days last month - and in August - when we had those really violent swings of 30, 40, 50+ points inside a minute or so (I'm thinking of the YM) - many of them were surprisingly readable and clean. I did extremely well on those days; it was almost as if the market was moving too fast to have time to play its usual games.
Tim.

 

[bedsit]

Initially newbies chase the price. They see a big move (after watching CNBC say) and want to get in. They normally end up buying near the high or selling near the low.

After a while they think they can pick tops and bottoms, so they try counter trend trading instead..

Both of these strategies, in the hands of a Newbie, may well be worse than a random entry.

brings back bad memories

 

[donaldduke]

I don't see why it's an issue if a newb is effectively a coin to$$er. They'll theoretically win and lose and not garner much negative emotional capital.

Its not the wins and losses that directly break a newbie, it is position sizing.

After two or three losses in a row the newb may well double or triple up in his spread bet account. The so called gamblers fallacy.

But after two or three wins in a row there is no such temptation.

Ralph Vince did an experiment with forty Ph.D.s. He ruled out doctorates with a background in statistics or trading. All others were qualified. The forty doctorates were given a computer game to trade. They started with $1,000 and were given 100 trials in a game in which they would win 60% of the time. When they won, they won the amount of money they risked in that trial. When they lost, they lost the amount of money they risked for that trial.

Guess how many of the Ph.Ds had made money at the end of 100 trials? When the results were tabulated, only two of them made money. The other 38 lost money. Imagine that! 95% of them lost money playing a game in which the odds of winning were better than any game in Las Vegas. Why? The reason they lost was their adoption of the gambler's fallacy and the resulting poor money management

 

[TheBramble]

Reasons the majority (retail traders) fail.

They trade outright directional – and consider little to nothing else.
Lack of versatility. Lack of knowledge. Lack of experience. Lack of motivation. Lack of passion. Lack of research. Lack of genuine interest.

Spread will effectively iron out any and all attempts for the trader to profit where stops and targets are set too close to the inside. You can’t pay the broker more than you pay yourself for each trade on a long term basis. (However, the broker is more than happy for you to do so…)
Lack of basic business acumen.

Trading too close to current volatility. If price action looks like a whipsaw, rather than change TF, or instrument, or strategy, or even just sit out - they’ll still try and play it with roughly the same size stops and profit targets and strategies and they always do. If they don’t miss the irony in “You’re going to need a bigger boat” they manage to be surprised when they get tossed out when it gets choppy, when even simply just hanging on would have been enough. (Bit of a nautical weekend, sorry).
Lack of perspective. Lack of awareness. Lack of flexibility. Lack of commonsense.

Trading too far away from current volatility. For any given asset class in any given time frame for any given type of price action there is not only a ‘sensible’ estimation of potential profit levels and an intuitive grasp of when and where not those price levels will likely (or not) be achieved as well as an equally sensible expectation of length of time of trade. The alternatives (which require no real work, effort, experience, diligence or intelligence) are random and on-the-fly assessments of profits and a seeming lack of the basic awareness that there is a relationship between time in trade, profit potential and earnings over time. Pips or points per unit time. You don’t want to be paying yourself minimum wage.
Lack of effort. Lack of diligence. Lack of intelligence. Lack of experience. Lack of awareness of basic cost of time.

Not understanding the current level of volatility and failing to trade outside the noise but within the vol bands. If you’re unable to spot that you’ve got a potential 20 point/1000 pip cycle to play with AND that you have choppy little 2 point/ 100 pip wavelets to deal with or having spotted it but not constructed and executed your traded accordingly – that would be rather stupid.
Lack of lack of stupidity. Lack of perspective. Lack of experience. Lack of skill. Lack of basic market activity comprehension.

When with all your efforts you are clearly wrong and all the parameters which you set prior to taking the trade let you know you are wrong, you get out. I’m not just talking about hitting your initial (or any subsequently positively revised) stop, but all the other factors which need to be ‘in place’ for you to take a trade in the first place. When sufficient number of these factors no longer hold, there is a point where the sensible trader knows they should no longer be in this trade. They get out (preserve capital). If sufficient number of these factors have come so far back to warrant an entry in the opposite direction to the trade just exited for a loss, they will take the trade without a second thought, without looking back. Most do not.
Lack of lack of ego. Lack of flexibility. Lack of lack of emotion. Lack of discipline.