Why is trading difficult?

[ManBear]

I am a beginner, my only experience was a one-off purchase of LBG shares when I worked for the company 2 years ago. The price had plummeted to 20p, now its at 75p. I thoroughly understand that this is an unusual return.

But, when I stumbled upon this forum, in many of the beginner threads I see many posters saying that trading profitably is extraordinarily difficult and takes a huge amount of hard work. However, looking at the FTSE, if you were to invest exactly 1 year ago, the index has gone up 17% since. This, along with typical theories of economic growth, suggests that the share prices of large companies, in general, go up.

So what is it, I ask, that makes it so difficult to be profitable? Are the trading fees so large that this general trend is outweighed? What is it that makes investing your savings in shares in a few large companies so difficult? Am I missing something obvious? Or just being too optimistic?

Thank you.

 

[Shakone]

I am a beginner, my only experience was a one-off purchase of LBG shares when I worked for the company 2 years ago. The price had plummeted to 20p, now its at 75p. I thoroughly understand that this is an unusual return.

But, when I stumbled upon this forum, in many of the beginner threads I see many posters saying that trading profitably is extraordinarily difficult and takes a huge amount of hard work. However, looking at the FTSE, if you were to invest exactly 1 year ago, the index has gone up 17% since. This, along with typical theories of economic growth, suggests that the share prices of large companies, in general, go up.

So what is it, I ask, that makes it so difficult to be profitable? Are the trading fees so large that this general trend is outweighed? What is it that makes investing your savings in shares in a few large companies so difficult? Am I missing something obvious? Or just being too optimistic?

Thank you.

A lot of people are trading short term, minutes, days, weeks, rather than holding for years. Trading rather than investing. Yes if you had gone long the FTSE you would have had a decent return. But what if you had gone long in 2007 or the first half of 2008? Or long in 2000? You could invest in some large companies, but then what about if you invested in apple at 700, or any of the banks before crisis. To make money you usually have to take on risk. Sometimes it's easy to make money, sometimes not.

 

[ManBear]

A lot of people are trading short term, minutes, days, weeks, rather than holding for years. Trading rather than investing. Yes if you had gone long the FTSE you would have had a decent return. But what if you had gone long in 2007 or the first half of 2008? Or long in 2000? You could invest in some large companies, but then what about if you invested in apple at 700, or any of the banks before crisis. To make money you usually have to take on risk. Sometimes it's easy to make money, sometimes not.

But barring financial crises, investing in large firms (rather than trading), is a perfectly reasonable alternative to savings accounts, and you should not necessarily expect to lose money?

 

[Shakone]

But barring financial crises, investing in large firms (rather than trading), is a perfectly reasonable alternative to savings accounts, and you should not necessarily expect to lose money?

Yes it's perfectly reasonable. But I wouldn't say you shouldn't expect to lose money.

We're in a bull market so these sorts of things look easy, I'm just trying to say that they are not always so easy. You can't cherry pick examples after the fact and think that it is easy to make money long term in the markets.

Let me put it another way. Suppose in you just invested in the FTSE (or a weighted combo of companies that's not so different from the FTSE in practice) in 2000. By early 2012, you would be showing a small loss, and your money would have been tied up for 12 years while inflation eroded it. Of course you may have some dividends to counter that out, but for 12 years, you wouldn't really have made anything. Another 2 years later and you'd be showing a small gain. 13-14 years of capital tied up for meagre gain.

So yes, investing is reasonable but there's no free lunch. You still have to invest wisely or you can expect losses.

 

[ManBear]

Yes it's perfectly reasonable. But I wouldn't say you shouldn't expect to lose money.

We're in a bull market so these sorts of things look easy, I'm just trying to say that they are not always so easy. You can't cherry pick examples after the fact and think that it is easy to make money long term in the markets.

Let me put it another way. Suppose in you just invested in the FTSE (or a weighted combo of companies that's not so different from the FTSE in practice) in 2000. By early 2012, you would be showing a small loss, and your money would have been tied up for 12 years while inflation eroded it. Of course you may have some dividends to counter that out, but for 12 years, you wouldn't really have made anything. Another 2 years later and you'd be showing a small gain. 13-14 years of capital tied up for meagre gain.

Absolutely, I understand there is risk. But when I say you shouldn't necessarily expect to lose money, I am referring to statements claiming 90% of investors lose money and its near impossible to be in profit. When in fact, just looking at the state of the world one year at a time, and perhaps basing your picks on some sound research into the company, then there is a very good chance (significantly north of 10%) that you will be in profit. Is that assertion incorrect?

 

[timsk]

Absolutely, I understand there is risk. But when I say you shouldn't necessarily expect to lose money, I am referring to statements claiming 90% of investors lose money and its near impossible to be in profit. When in fact, just looking at the state of the world one year at a time, and perhaps basing your picks on some sound research into the company, then there is a very good chance (significantly north of 10%) that you will be in profit. Is that assertion incorrect?

Hi ManBear,
Here's a chart of the S&P 500 index going back to 1997 to illustrate Shakone's point:



An investor who starts in the year 2000 would have experienced a considerable drawdown in 2003 and again in 2009. Conversely, someone starting out in 2003 and 2009 would be doing okay now. Over the long term, i.e. 15 years plus, most investors will enjoy a positive return based on historical figures. This is due to economic growth which is something all western governments strive towards. That's why you are highly unlikely to find a long term investor who is short the market - they are always long.

However, in the short term - i.e. days, weeks or a few months - markets are not so predictable and price can meander all over the place. So, while the long term investor might expect to double their money over, say 20 years, T2W members hope to do that in one year - or even less. One or two succeed, most fail and a few lose most or all of their money trying. Does that address your question?
Tim.

 

[Shakone]

Absolutely, I understand there is risk. But when I say you shouldn't necessarily expect to lose money, I am referring to statements claiming 90% of investors lose money and its near impossible to be in profit. When in fact, just looking at the state of the world one year at a time, and perhaps basing your picks on some sound research into the company, then there is a very good chance (significantly north of 10%) that you will be in profit. Is that assertion incorrect?

If you go to a roulette wheel and bet on red, and only do it once, then your chances of success are significantly north of 10%, but you can still lose money. Likewise if you take one trade, buy and hold, your chances will be significantly north of 10% as you say. If you bet lots of times, the chance of success overall goes down.

Sound research may help you, but what is sound research and what is irrelevant research? There are lots of hedge funds, banks and private investors involved in this game, and some of them have great resources and teams of employees to do research, and many of them still lose. Can you beat them at that game? Maybe if you're highly intelligent you could. I wouldn't be able to compete on those terms.

 

[Martinghoul]

Absolutely, I understand there is risk. But when I say you shouldn't necessarily expect to lose money, I am referring to statements claiming 90% of investors lose money and its near impossible to be in profit. When in fact, just looking at the state of the world one year at a time, and perhaps basing your picks on some sound research into the company, then there is a very good chance (significantly north of 10%) that you will be in profit. Is that assertion incorrect?

I think the statement you refer to is "90% of traders lose money". If you're an investor armed with some common sense, your odds of losing money are, in fact, reasonably low.

 

[ManBear]

If you go to a roulette wheel and bet on red, and only do it once, then your chances of success are significantly north of 10%, but you can still lose money. Likewise if you take one trade, buy and hold, your chances will be significantly north of 10% as you say. If you bet lots of times, the chance of success overall goes down.

Sound research may help you, but what is sound research and what is irrelevant research? There are lots of hedge funds, banks and private investors involved in this game, and some of them have great resources and teams of employees to do research, and many of them still lose. Can you beat them at that game? Maybe if you're highly intelligent you could. I wouldn't be able to compete on those terms.

The roulette analogy is correct if you assume that the chance of the share price going up is <50%, when in a time of economic growth, I don't believe that to be the case. The multiplier effect should actually reduce the risk of significant failure.

I should make it clear, I am not going to start trading daily or even weekly, I am planning a few longer term [~year long (intended but flexibility to be longer if necessary)] investments to put a portion of my capital into. So I came across this site looking for tips for that sort of investment, is this the wrong place for that? If so, can you recommend a better option?

Thank you for all your responses.

 

[ManBear]

Hi ManBear,
Here's a chart of the S&P 500 index going back to 1997 to illustrate Shakone's point:

View attachment 168482

An investor who starts in the year 2000 would have experienced a considerable drawdown in 2003 and again in 2009. Conversely, someone starting out in 2003 and 2009 would be doing okay now. Over the long term, i.e. 15 years plus, most investors will enjoy a positive return based on historical figures. This is due to economic growth which is something all western governments strive towards. That's why you are highly unlikely to find a long term investor who is short the market - they are always long.

However, in the short term - i.e. days, weeks or a few months - markets are not so predictable and price can meander all over the place. So, while the long term investor might expect to double their money over, say 20 years, T2W members hope to do that in one year - or even less. One or two succeed, most fail and a few lose most or all of their money trying. Does that address your question?
Tim.

Thank you, that makes it a little clearer. If the target with a few longer term investments is merely to keep up with inflation, would you say that is a reasonable target? and carries a relatively low risk?

 

[ManBear]

I think the statement you refer to is "90% of traders lose money". If you're an investor armed with some common sense, your odds of losing money are, in fact, reasonably low.

That is what I was hoping to hear!

 

[timsk]

So I came across this site looking for tips for that sort of investment, is this the wrong place for that? If so, can you recommend a better option?

Hi ManBear,
Yeah, the focus of this site and its members is very short term indeed. Most members are either day traders or swing traders - i.e. holding positions for a few days at a time but not much more than a week on average. There are position traders who hold trades for a few weeks to a few months - but they are fewer in number.

There are any number of sites dedicated to investors who hold for the longer term. If it's specifically a community forum you're after - try The Motley Fool
Good luck.
Tim.

 

[toknees]

Hi ManBear
What makes trading difficult? Emotions like greed and fear. You are right to look at it and think that it should be easy. It really should be. You choose a bunch of stocks you like the look, cut your losers and run your winners.
But what happens when one of your stocks starts to lose? Many people will hold on to the loser to give it a chance to turn around... nobody wants to sell something for less than they paid... It keeps going lower until you have to sell it at a huge loss.
What happens when one of your stocks starts to win? Chances are after looking at the unrealised profit for a few days or weeks with it going sideways and down a bit, fear of it dropping further will get you out. You locked in some profit, but it hasn't covered your huge loss from earlier, and as soon as you get out it jumps 5%. You feel crap for missing the move. It keeps going up 2% every day and higher than you thought it could until you are fed up with missing out so you get in - you get in and it goes up 2% the next day - woo! Then suddenly an earnings report comes out and reveals that the market was getting a bit carried away and it drops 6%. Oh dear, you missed the move up and paid for the correction.
Or how about this one? You pick a few stocks and they go up. One of them you really like the look of - the company has a new product and you think it's magic and the stock can't fail so you buy much more of that stock than any other. Annoyingly your favourite stock tanks while the other stocks you didn't like do really well. Unfortunately the size of your loss in your favourite stock wipes out any gain in the others by a large margin.
There are literally thousands of these scenarios, and I'm happy to say I've let myself be victim to all of the above and more (to various degrees). Why am I happy about it? Because every time I made one of these classic errors, I learned more about myself and gained experience that will hopefully prevent me from making the same mistakes. If you can separate your emotion from your trading and formulate a strategy that you can stick to avoiding any 'gut' feeling you can be hugely successful.

 

[malaguti]

Thank you, that makes it a little clearer. If the target with a few longer term investments is merely to keep up with inflation, would you say that is a reasonable target? and carries a relatively low risk?

If you bought Lloyds back in 2000 (economic growth was good then) when it was over £8 and your intention was to just cover inflation, when would you have decided to cut your losses?
If your aim is to hold for years, thats great, but now 13 years later its at 70p. Its not about time you hold on to something, its about timing.
The timing as to when to cut your losses, and your timing to reenter. There was still loads of money to be made when it got down to 17p. Now rising over 500%..but then you wouldn't have been able to, because you might still be holding on at 800 and all your capital is being tied up because you thought it was less risky just to meet inflation.

Whether you hold for one week, or a century, it doesn't make a difference the principle is exactly the same.
So now in 2013 you might decide to buy Vodafone for example, what would you do if that starts to fall, you could be looking at another Lloyds? When will you exit, when will you enter again?
Thats when things begin to get a bit more difficult

 

[tar]

I am a beginner, my only experience was a one-off purchase of LBG shares when I worked for the company 2 years ago. The price had plummeted to 20p, now its at 75p. I thoroughly understand that this is an unusual return.

But, when I stumbled upon this forum, in many of the beginner threads I see many posters saying that trading profitably is extraordinarily difficult and takes a huge amount of hard work. However, looking at the FTSE, if you were to invest exactly 1 year ago, the index has gone up 17% since. This, along with typical theories of economic growth, suggests that the share prices of large companies, in general, go up.

So what is it, I ask, that makes it so difficult to be profitable? Are the trading fees so large that this general trend is outweighed? What is it that makes investing your savings in shares in a few large companies so difficult? Am I missing something obvious? Or just being too optimistic?

Thank you.

The threads you see here about how difficult is trading and how it is very hard to make money its mostly related to daytrading , daytrading is a pipe dream , many members dream on making a comfortable living from daytrading which is not going to happen they question their abilities and they continuously seek for an edge .. etc ofcourse such thing dont exist for a retail trader .

The problem is in daytrading itself , the commissions and costs are very high compared to ATR , and when you day trade your timing has to be dead on , its hard , plus when you daytrade you have to use higher leverage and trade bigger to compensate for the small returns which will lead to a whole load of issues and emotional trading will take over , is it possible to succeed at daytrading will yes but its very hard and you are not going to make real money even if you can do it unless your account is big , the odds are against you and the returns are not that tempting .

Now when we talk investing we are talking about portfolio investing , you don't put your whole eggs in one basket "Apple or LLoyds or Gold .... etc " , your odds are better in investing , you have to work hard do your research , diversify and don't buy into bubbles .

 

[Splitlink]

I know what is the matter with me--to keep criticism of others in perspective---and there are many like me.

I think that I have controlled my problem, in part, with target orders and the discipline to cut the trade above breakeven..

I picked, what I believed, was a good trade, let it go to a certain number of points profit and then I tried for more. The result is that, if it runs back I am comfortable, as it is in profit. Quite often, though, it runs into loss because traders who bought when I did, are often experts who are content to take a few points profit, when I did not, and a lot of other reversing trades clicked in, pushing my trade into loss.

The end result of this is that, in addition to the spread, my mental processes were biased towards a loss as soon as it ran back from maximum profit. "Oh, that's alright, it will probably come back" sort of thing.

This is a psychologocal block, I'm not a great one for reading those sort of threads, but I acknowledge that that is what it is. Knowing the problem helps to dominate it.

To cut out momentum traders trading against me I prefer to let the bar complete and the next one to continue a couple of points, That is not a sure recipe, but it protects against making lot of premature trades and spikes-- a lot of breakouts do spike beyond and come back.

In a nutshell, a trader with that mentality is biased towards a loss on every trade that he makes.

To avoid the above, I do not believe that 5 minute bars are sufficient to be allowed to complete. I think that it needs more time, depending on the instrument but that is another problem for the trader to decide.

To allow a bar to complete, BTW, I have to enter manually. Orders to enter at breakout will, almost certainly, be triggered and a lot will result in a loss if one is a daytrader.

 

[Forexmospherian]

Trading to make money on a continual basis over weeks months and years is very difficult mainly because you need different "multi-skills" - with most of them taking a long time to develop - ie many years rather than many weeks

If you can compare say to going to a top football player like Ronaldo or Messi and say to them can you teach me all your footie skills - they would immediately say its taken years and years to get to a top level and unless you can commit to the dedication and effort they have - then you have no chance.

So first hurdle for Forex traders - ( I have only traded fx - so sticking with something I know) is to really be able to understand price action at a "coalface" or intraday level. That is essential and to coin a phrase - "the devil is in the detail"

Generally to get to a high level you will need to do 10,000+ hours watching live charts - ideally under a 5 min time frames.

Back testing and other methods cannot really assist you - you need real time - not history etc as it always looks easy in hindsight.

Now if you have loads of spare time on your side and could spend say 6 hrs a day watching live charts at key periods ( Europe and US sessions) then to achieve 10k hrs will take approx 1600+ days to say - yes I am now at the level required to read PA at more than a 50% accuracy level - (65 -80% is achievable even on 100's of trades - by traders who have undertaken this achievement )

The trouble is - if say 240 trading days pa - allowing for holidays etc - then 1600+ days will take 7 years +

Yes maybe after 5000 live hrs - ie 3- 4 years on the way as - you will by then have developed the skill - but still not at the higher level

Now here is the real crux of the matter - 90% of new traders will be part time and cannot spare 30+ hrs a week - and so might only be able to spare say 10 -15 hrs a week - ie a couple of hrs every day.

That means these traders will take 7 yrs to get to a good level - and over 14 yrs to do their 10k live hours watching charts.

To make it worse - if you are a 4 hr of daily frame trader - it will take you 10 -20 years to really understand PA at the levels you need to have a chance of getting over 65% + of your trades correct and that's why most ie 80 or 90+ % of traders fail - they just have not done the study and the time.

To learn the other skills - ie advanced money management - psychological strength and correct mental attitude etc - can all be achieved in a year or less - although many traders will fail on both these skill requirements and really then should question should they carry on.

OK automation etc can help - but only if the strategy as been tested over 1000's of live trades - ideally over at least 2 years - and is still capable to go through further evolution - simply because the market is dynamic and for ever changing etc

There will always be part time traders who can make 10 -50% per annum gains on their small accounts - on going - they might have losing weeks or even months and count themselves as being successful - but hardly worth going full time unless you have a quarter of a million plus account - and not many retailers have - and also trading on say 20 full lots is a different ball game to a dollar a pip.

With myself - yes I have easily done over the 10k hrs after 11 years forex trading with 6 yrs full time. Yes I can make the 20 -50% account increases per month ( yes per month) on accounts up to $50k - but give me a quarter or half a million capital account - and I would have a job maintaining 5 -10% a month increase - as I know my own "financial psychological wall" - and bottle it over approx 15 lot trades - but have now problem with 3-10 lot ones - doing between on average 10 -20 trades most days I trade

I have taken now over 13k live trades and have had thousands of losses - but most of them all well controlled with my stops being normally 4 -7 pips - maximum - ( yes that's what you can do when you have done your time and study;-) )

I have had 20+ winning trades on the "trot" - but also suffered many 3 -5 bad consecutive losses and even the odd "black swans" leading to more than 7 bad trades in a row

Therefore my winning ratios on approx 100 trades can be as low as approx 62% to as high as 87% - the market is dynamic - it will never be constant to within say 5% margin

I have been doing a thread under discretionary trading here on T2W for this month on November and its had over 20k views and I have made now over 1500+ pips in that time - with most importantly - no losing day - yes no losing day

That is down to skill - technique and advanced MM - stuff that takes many many years to develop - so it is possible - and that's one of the reasons why I am doing the thread - just to show it is possible

Regards

Forexmospherian

 

[timsk]

Trading to make money . . .

Hi Forexmospherian,
Reading your posts reminds me of the film Groundhog Day - as I've read this particular one 2 or 3 times in the last week or, at least, minor variations of it. As you'll only be too aware, during your short tenure here on T2W, you've managed to unite a collection of some long standing and well respected members against you. I have to say, based on posts like this one, it's not hard to see why. So, pray tell, what do you hope to achieve by repeatedly telling everyone that you're an expert? I ask because of all the experts I've ever met (in any field, not just in trading), tend to be humble folk who would never brag about their achievements on a public forum like T2W. By the same token, all the people who make claims like yours turn out to be - almost without exception - vendors of one sort or another that can't trade for toffee but are fairly adept at separating gullible and impressionable newbies from their money. The question is: are you going to be the exception that proves the rule?
Tim.

 

[Forexmospherian]

Hi Forexmospherian,
Reading your posts reminds me of the film Groundhog Day - as I've read this particular one 2 or 3 times in the last week or, at least, minor variations of it. As you'll only be too aware, during your short tenure here on T2W, you've managed to unite a collection of some long standing and well respected members against you. I have to say, based on posts like this one, it's not hard to see why. So, pray tell, what do you hope to achieve by repeatedly telling everyone that you're an expert? I ask because of all the experts I've ever met (in any field, not just in trading), tend to be humble folk who would never brag about their achievements on a public forum like T2W. By the same token, all the people who make claims like yours turn out to be - almost without exception - vendors of one sort or another that can't trade for toffee but are fairly adept at separating gullible and impressionable newbies from their money. The question is: are you going to be the exception that proves the rule?
Tim.

Hi Tim

I think this particular site as unfortunately bought out the "beast" in me ;-)) - simply because I have never accounted so many moaners and fault finders who were determined to make out I was a fraudster selling FX stuff and ripping new traders off.

The answer there is with out doubt

NO - I am the exception to the rule - ie the real deal - ie not selling anything - just showing what can be done with a lot of intraday experience in forex gathered over 11 years of trading

I spent approx 2 years on another site - and during that time had 300+ member who befriended me - ( i befriended only about 15 people ) and followed me daily - they would openly comment - thank you for being helpful and courteous and also remaining humble and with no bragging etc etc

Then things changed in July / August - after I won a competition - and I got the haters on trying to pull me apart by saying I was on a demo account and was not a proper trader.

That lead to many traders getting banned for rude abuse etc and the site seemed to have traders having big arguments every week - ie the scalpers V 4 hour brigade - etc etc

So i and approx 8 of my fellow members who were intraday traders had our "group" closed and we then left the site on very amicable terms - with the owner of the site thanking us for all our contributions

I am not on Twitter or Face book etc and I am probably not use to this new culture of trying to annoy others and "winding" them up. So now I have accounted it - I think I will give as a I good as I get - and if you can do it - flaunt it ;-))

It is certainly not my normal character - I am laid back and non argumentative and in real life - very humble.

I really hope this characteristic will come out and appear more in the future - as to be quite honest I strongly dislike big headed people - and therefore certainly don't want to become one myself.

Therefore 90%+ of the members who raise questions etc with me will be treated very respectfully etc etc and I can say to them that during my first 18 -24 months learning forex - I was no good and a loser and nearly gave it up a few times

Thankfully - that changed ;-)

Regards

F

 

[numbertea]

Hi Tim

I think this particular site as unfortunately bought out the "beast" in me ;-)) - simply because I have never accounted so many moaners and fault finders who were determined to make out I was a fraudster selling FX stuff and ripping new traders off.

The answer there is with out doubt

NO - I am the exception to the rule - ie the real deal - ie not selling anything - just showing what can be done with a lot of intraday experience in forex gathered over 11 years of trading

I spent approx 2 years on another site - and during that time had 300+ member who befriended me - ( i befriended only about 15 people ) and followed me daily - they would openly comment - thank you for being helpful and courteous and also remaining humble and with no bragging etc etc

Then things changed in July / August - after I won a competition - and I got the haters on trying to pull me apart by saying I was on a demo account and was not a proper trader.

That lead to many traders getting banned for rude abuse etc and the site seemed to have traders having big arguments every week - ie the scalpers V 4 hour brigade - etc etc

So i and approx 8 of my fellow members who were intraday traders had our "group" closed and we then left the site on very amicable terms - with the owner of the site thanking us for all our contributions

I am not on Twitter or Face book etc and I am probably not use to this new culture of trying to annoy others and "winding" them up. So now I have accounted it - I think I will give as a I good as I get - and if you can do it - flaunt it ;-))

It is certainly not my normal character - I am laid back and non argumentative and in real life - very humble.

I really hope this characteristic will come out and appear more in the future - as to be quite honest I strongly dislike big headed people - and therefore certainly don't want to become one myself.

Therefore 90%+ of the members who raise questions etc with me will be treated very respectfully etc etc and I can say to them that during my first 18 -24 months learning forex - I was no good and a loser and nearly gave it up a few times

Thankfully - that changed ;-)

Regards

F

I for one, appreciate honesty but also the ability to not always hold back the great achievements one as made. Humbleness is a subjective description. In a forum where all have growing trade accounts it is okay to tell a little of ones good fortune. I like to think that all who read and learn from this forum will not allow themselves to become victims of a horrendous trade so why should anyone have to "walk around eggshells" and cater to weak emotions of those who might be offended. This is a forum of learning!

Cheers