A retired stockbroker tells me why most retail investors lose money

Overnight said:
It is also revealed in the usernames they pick when joining a message board such as ET.

You do have one of the stupidest damned nicknames on any forum, everywhere.
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I don't agree. It is not revealed in their alias, but in their behavior.
Hide your personality in an alias is far easier than doing that in your behavior.

For instance people, who post 12 post a day in all areas (which leads to then thousands of posts), are probably thinking they are smarter than the rest. This can lead to very stupid reactions by these "geniuses", just showing they are not that smart.
It is also possible that their conclusion is the result of not unterstanding the post/poster that they attack (lack of intelligence?). Speaking about stupidity...
 
Cut losses, run winners is not a holy grail by any means. Try a system where you flip a coin and risk 1% to make 3% randomly. You will be around breakeven after 1000 trades. Down after costs. Same if you go and risk 3% to make 1% randomly. I’ve worked with dozens of highly successful traders that averaged down, risked more than they stood to make and everything in between. The fact is, unless you have a statistical edge it means nothing and cutting losers and running winners is a sound way to ensure you don’t lose everything but it is not a way to make money in isolation.
 
Not following you..Are you saying,if one plays a games with a 50% chance of winning and making 3 percent when right and only losing 1 percent when wrong ,the game does not have positive expectancy???

And if you flip your risk reward,you have the same expectancy as the risk 1 to make 3?


If you compound your returns,you indeed have to be very careful controlling losses,and for every hit rate per # of occurrences,there is an optimal risk reward,I.e profit target vs stop.

Losses are geometric and very nasty..Other than hypothetically "changing" your win rate,how do you get around that??

I must be missing something..



















tommo said:
Cut losses, run winners is not a holy grail by any means. Try a system where you flip a coin and risk 1% to make 3% randomly. You will be around breakeven after 1000 trades. Down after costs. Same if you go and risk 3% to make 1% randomly. I’ve worked with dozens of highly successful traders that averaged down, risked more than they stood to make and everything in between. The fact is, unless you have a statistical edge it means nothing and cutting losers and running winners is a sound way to ensure you don’t lose everything but it is not a way to make money in isolation.
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taowave said:
Not following you..Are you saying,if one plays a games with a 50% chance of winning and making 3 percent when right and only losing 1 percent when wrong ,the game does not have positive expectancy???

And if you flip your risk reward,you have the same expectancy as the risk 1 to make 3?


If you compound your returns,you indeed have to be very careful controlling losses,and for every hit rate per # of occurrences,there is an optimal risk reward,I.e profit target vs stop.

Losses are geometric and very nasty..Other than hypothetically "changing" your win rate,how do you get around that??

I must be missing something..
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Youre making an incorrect assumption that it’s 50/50. If you flip a coin and risk 1 to make 1 the odds are 50/50. If you flip a coin and risk 1 to make 3 your odds are about 33%. The reason being there is far more chance the market makes the small move to your stop than the large move to your target.

If you happen to find a way to have a 50% win rate risking 1 to make 3 then you have cracked the game and will make a fortune. But that’s where edge comes into it which 99% of people don’t have. But without an edge risk 1 to make 3 you will lose 77% of the time. I recommend people setting up a demo account and try random trading with fixed risk reward the winning percentage always lowers with wider targets to bring you to break even at best
 
I see,you and I have a different definition of "odds" and hence expected return.I look at odds as the probability of an event occurring..The return vs loss,profit target vs stop has nothing to do with the odds in a theoretical example.

I get that in the real world as you change your stop,your hit rate will vary..But there is an optimal profit vs stop for given hit rates..










tommo said:
Youre making an incorrect assumption that it’s 50/50. If you flip a coin and risk 1 to make 1 the odds are 50/50. If you flip a coin and risk 1 to make 3 your odds are about 33%. The reason being there is far more chance the market makes the small move to your stop than the large move to your target.

If you happen to find a way to have a 50% win rate risking 1 to make 3 then you have cracked the game and will make a fortune. But that’s where edge comes into it which 99% of people don’t have. But without an edge risk 1 to make 3 you will lose 77% of the time. I recommend people setting up a demo account and try random trading with fixed risk reward the winning percentage always lowers with wider targets to bring you to break even at best
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taowave said:
I see,you and I have a different definition of "odds" and hence expected return.I look at odds as the probability of an event occurring..The return vs loss,profit target vs stop has nothing to do with the odds in a theoretical example.
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In all my years here on ET you are the first (that I've noticed anyway) who believes what I believe when it comes to the word risk; defined as the probability of an event occurring. Not x number of dollars etc.
 
It's a very interesting exercise to choose a fixed ratio of stop loss to profit target, and plug in different "odds" I.e win rate...

Risking 1 to make 3 has vastly different returns than risking 9 to make 27,assuming the same probability and compounding ..

I know it's a bit theoretical,but as a trader one can not understate the importance of controlling losses.

Look at the compounded return of 3 trades, +50%,+50%,-50%...

Notice order has no bearing..
 
taowave said:
I see,you and I have a different definition of "odds" and hence expected return.I look at odds as the probability of an event occurring..The return vs loss,profit target vs stop has nothing to do with the odds in a theoretical example.

I get that in the real world as you change your stop,your hit rate will vary..But there is an optimal profit vs stop for given hit rates..
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Sure, but the odds of a random system with a 1:3 reward to risk ratio is only 33% of your trades win and you won’t make any money.

with a risk 2 to make 1 system the odds are you will with about 70% of the time and not make any money too. It’s only edge that turns a profit and it’s nothing really to do with risk reward ratio.

casinos risk 36 to make 1 on a roulette wheel and they always win over time.
 
You are way way off

Forget edge,thats a totally different subject as how it relates to position sizing and money management..Dont confuse the 2...

In the perfect world,to maximise returns you need both...

You are way way off and not understanding what I am saying. Run a quick simulation of varying 2-1 ratios, with varying hit rates and compounding..

If you backtest,or can accurately approximate your "odds",you can compute the optimal risk reward /stop and profit target...

The casino example is ridiculous :)















tommo said:
Sure, but the odds of a random system with a 1:3 reward to risk ratio is only 33% of your trades win and you won’t make any money.

with a risk 2 to make 1 system the odds are you will with about 70% of the time and not make any money too. It’s only edge that turns a profit and it’s nothing really to do with risk reward ratio.

casinos risk 36 to make 1 on a roulette wheel and they always win over time.
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