Why is trading difficult?

ManBear

Newbie
6 0
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

Senior member
2,458 665
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

Newbie
6 0
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

Senior member
2,458 665
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.
 
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ManBear

Newbie
6 0
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

Legendary member
7,021 1,847
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:

SPX.png

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.
 
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Shakone

Senior member
2,458 665
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

Senior member
2,690 276
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.
 
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ManBear

Newbie
6 0
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

Newbie
6 0
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?
 

timsk

Legendary member
7,021 1,847
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.
 
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toknees

Junior member
22 3
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

Senior member
2,361 455
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

Legendary member
10,441 1,309
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 .
 
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