Quote from bbmat:
Oddiduro,
a simple answer that you might hear a lot is:" Because many people let their emotions get into play. If they were to trade a system then they would not lose." This, fortunately is not my opinion. Of course trading on emotions is already a lost game. But what contributes most to small traders losing it all is the relatively high commission costs, slippage (=lack of real speed and accuracy of executing trades), the lack of knowledge of statistics and the missing of an own opinion on the future development of markets.
This all is not a problem to larger speculators and hedgers. Hence, they win in the long term and small traders lose. BTW, hedgers have got different motivations than speculating and hence their payoffs should be judged relative to their risk and investments.
Larger traders/hedgers enjoy much lower commissions, their slippage is minimized as they often deal through established broker relationships, they trade through highly sophisticated trading systems (with xtrader being on the lower end of the systems available to them), they have access to statisticians and quants (which allows them to assess probabilities and risk in a much more refined form than small traders), and because larger traders and hedgers often trade positions, meaning fundamental analysis play a much larger role than for small traders (as fundamental analysis is quite cumbersome and can get quite complicated to come up with useful figures and quantification).
Now, why do I compare small traders with large traders and hedgers? Talking of commodities markets, they are fundamentally different from stock markets. In commodities, money made is always money lost by another party. So, that party that enjoys all the advantages takes funds from those parties less equipped with knowledge, execution platforms, information, and low execution costs. Therefore, in the long run probabilities are very very high that a small trader loses in commodities against the big fish (unless, and this is my opinion, one develops a view on the markets and is more often right than wrong; given, sound money and risk management is applied). This being more right than wrong is what I call having an edge in the markets. I firmly believe that trading technical systems is not making any money in the long term as commission and slippage is too high and as such systems fail to take into account the (almost) perfectly efficient markets. Small traders, asserting that their systems profit from such tiny imbalances are in my opinion making up stories and most often have something to sell to the public (which is their flawed systems or advise or what have you).
This is, in a nutshell, why I believe a small trader in commodities should focus on fundamental analysis mixed with some technical analysis (for the sole purpose of trade execution). Almost all studies have proven that small traders, who trade on technical analysis only, lose over time. Ok, I admit its not an academic proof, however, I have not found a single (serious) study that shows that over long time technical traders are profitable. (now there are guy who will attack me for having said that, citing some references where someone analyses market imbalances. But as I mentioned, those imbalances, in my opinion, cannot be beneficially utilized by a small trader).
