Are trader's skills really important?

[DT-waw]

This is an old thread, but I'll ask you the same question again. Look at these facts: the average yearly return of Barclay CTA Index in years 1980-1990 was ~23%; and only ~6% in period 1991-2002. Huh the avg 3-month T-Bills yield in that period was ~4.5%... Does it mean that managers who operate in the '80s were significantly more skilled than managers from '90s and early '00s? Hell no.

Our famous trader, Hitman claims he made $100k in 2002. In his journal he estimates to earn 30k in 2003 after making 11k in the first 4 months of the year. Does it mean he is 70% less skilled in the current year? Well, maybe but I don't think so.

Perhaps the only thing we can label as "trading skills" in trading is the ability to avoid bankruptcy? However latest studies show there's little persistence in managed futures funds performance. Here's a quote from http://www.mfainfo.org/news/pr/5-27-98.htm :
"All of the methods revealed that a small amount of performance persistence is present. In fact, around 2 - 4% of the differences in fund returns each month is due to performance persistence which provides the potential, 'to use past returns to predict future returns' according to Professor Brorsen".

We don't have this type of research for individual traders. The following conclusion "Returns decreased as the money under management increased" indicates that small traders could generate higher returns.

Here's another interesting thing: "CTAs using short-term trading systems had returns about one-fourth less than CTAs using medium- or long-term systems".

The influence of luck factor on trading performance is unquestionable. The open question is how to measure or estimate it.

 

[ari_veru]

Let's take an example of a trader who does 100k shares volume a day, scaling in and out of his positions with small 200-300 share lots, so he ends up with 300 executions a day. I'll say his success depends more on skill than luck.

The luck for him could be getting more favorable market conditions (some trade better in bull markets, some in bear, some are momentum traders, and other do well in non-trending markets).

There's still a "bad luck" factor, like getting into a position and having the stock (or any other instrument for that matter) halted and opened at a point where the trader's account is wiped out, but overall I'll say that some styles of trading performance depend on skill much more than luck.

I personally know traders who have traded close to 3 years without a down month, and have had 5-6 month stretches with only 2-3 down days. Don't tell me they just got lucky, because the only luck for them was getting the chance to become a trader.

 

[gms]

There really is no such thing as "luck'. "Luck" is a concept that came out of ancient times and tied to now mythical, but back then very real, beliefs that forces were at work, usually from any one god you gained favor or disapproval from.

Instead of "luck", there are favorable and unfavorable circumstances, since life isn't perfect and never completely controllable. It's a series of probabilities, just like trading. There are times these circumstances work or interact well with one's actions, and that's when one feels they were "lucky". Sometimes it's merely being in the right place at the right time, doing the right thing at the right time, and/or others likewise so doing, and those actions/circumstances would be just some out of, let's say for example, out of the 10,000+ possibilities that could have been realized. Further assuming in our example that 4,583 such actions/circumstances were realized, out of which 2896 would produce a favorable outcome for you of various ranges, but 1687 would not have. Under those circumstances, and depending on what set of variables interacted, you'd think you're "lucky" or "somewhat lucky", bordering on "that was close!". And you would walk away thinking that you did something right, when it was a whole bunch of somethings on your part and on the part of others. And if the ratio was inverted, you'd say you were "unlucky". What does luck have to do with it, when the ratio of favorable/unfavorable circumstances is influenced, perhaps even porportional, to the variables *you've* brought to the table? If not, then don't bother learning how to drive, or drive safely, just get in the car and go. If you're "lucky", you'll get to your destination safe and sound. If you're "unlucky", heck, you wouldn't have made it anyway.

So, when it comes to trading, those variables you bring into the equation would need be whatever it is that gives you an edge, in effect, helping to make your own "luck". But certainly if you bring nothing into the equation, then your outcome is even more random, isn't it, and subject to the variables others bring... their edge.