Quote from jones247:
Blackjack, your point is virtually aligned with Nassim Taleb in his book, Fooled by Randomness. This is a man with a Phd in mathematical finance and worked several years as a pit trader. Nonetheless, he states that for the most part, it's all "luck"... skill can help you to earning excellent returns; however, to attain great wealth, one needs luck and skill... He emphasizes the fact that many folks will be successful with a particular strategy or indicator for several years, until the day or time period when it no longer works.
This is a load of crap, and underlines Nassib Taleb's lack of market understanding. Luck has absolutely NOTHING to do with your success across more than a handful of trades. ANYONE who trades a system that stops working and then doesn't know what to do is lacking in their market understanding.
Look at the great minds that blew-up after years of success... Victor Niederhoffer, LTCM, Charles Cottle (as far as I've read), Bear Stearns (in addition to several other hedge funds and banks), and so many others.
Lots of other people never blew up. George Soros comes to mind. If someone blows up it is usually for deep-seated psychological reasons, not because trading inherently involves luck, or because that luck eventually stops working. Just because some traders blew up doesn't prove crap about how the market really works.
One of the primary aspects of trader skill is what I call your "shut-off" switch. Your "shut-off" switch kicks in when you start doing something stupid, like getting angry, taking a bad trade, or maybe your system just stops working. If you are trading a system and it stops working, then you, as a trader, need to identify that and TURN THE DAMN THING OFF OR STOP TRADING. Then you need to find a better system that is working with current market conditions. This is in fact the
#1 SKILL OF ANY SUCCESSFUL TRADER. If you don't have this, you are royally FUCKED. If you don't have this, then you are NOT a trader - you are just a stupid idiot following a system and trusting to fate.
This could be happening on time frames as low as five minutes to time frames as high as a few months... but over your chosen time frame, when what you are doing stops working, adapt. You know that it isn't working because your trades are turning into losers and you are losing your market feel. Something is wrong, and you need to detect that. In this case, your skill as a trader is to flip your "shut off switch", and walk away. You regroup, re-analyze, and come back with something that DOES fit the current conditions.
People who blew up failed in this regard. Their "shut off switch" stopped working, or never worked. That shows their LACK OF SKILL AS TRADERS. It doesn't prove crap about the randomness of the market. If you have a shut-off switch, and if you use it, and if you can analyze the markets, you will always be successful.
Even someone such as Richard Dennis and the turtle system. Allegedly he made over 200 million with that system; however, he has since abandonded it after loosing about 50 million.
Which is a testament to his SKILL. If it was luck, he would have continued to trade and lost all 200 million, now wouldn't he? Personally I think he should have stopped before he lost that much... but in any case he did stop. That is where trading skill comes into play.
As Steve Cohen stated, "this is not a perfect game... you're going to be wrong alot". I believe he stated that most of his traders win about 50% - 55% of the time, with his best trader winning only about 63% of the time. This is billionaire who has several millionaires trading with his firm, SAC.
Of course you are going to be wrong a lot, on individual trades. That doesn't mean anything, especially since win % is irrevelant. Win % times average win size is what matters, as compared to loss % times average loss size. People who quote only win percentages betray their lack of understanding about trading.
In the longer run, when averaging out your performance through hundreds or thousands of trades, luck is not involved at all. Not even 0.00000000001%. NOTHING TO DO WITH IT. That is what losing traders cannot accept, which is why some of them come on this board and make fools out of themselves trying to prove otherwise.
The problem is that it works... until it doesn't. Unfortuneately, many have outsmarted themselves by being "fooled by randomness".
No, they have "outsmarted" themselves because they SUCK ASS. A great trader does not "outsmart" himself.
All of the people who had systems that worked, and then screwed up when those systems stopped working are basically traders that lack something in their market understanding. That includes a lot of so-called great traders who blew up, although I would suggest that in their case it was not so much a lack of understanding as deep-seated psychological issues. Just because a lot of people have internal issues doesn't mean that trading has anything to do with luck. One does not logically follow from the other.
TRUE market understanding cannot ever be screwed up. It cannot ever "stop working". If you are trading a system and that's all you know how to do, then you are at the mercy of market conditions. If market conditions change you are screwed, because you don't really understand the market in its full depth. A lot of people trade this way. A lot of people SUCK.
At its core, the market is nothing more than a large group of people buying and selling for one purpose only: to take each other's money. The way in which these people interact is not random, and it does not change. The patterns that print as a result of this activity will always be changing slightly, but at its core, the activity is always fundamentally the same and is very repeatable and detectable as it moves through its various phases.
Basically, the market alternately gyrates through periods of high emotion, and periods of boredom. It is your job as a trader to understand these conditions, how long they last, and detect when they are changing. This cannot be put into a system. You can't write a mathematical formula to describe this transition consistently. It just comes down to your human mind looking at the big picture, and saying to yourself "what phase is the market in right now"? Then you have a system to apply to that market phase.
A mechanical system itself cannot tell you which phase you are in and therefore which system you should use, because it's too complicated for a computer... but not for your mind. I can identify with much greater than 50% accuracy when a trend is beginning in a given instrument that I trade. I see the signs all the time, every damn day. IT NEVER CHANGES AT ALL. People who don't understand this stuff just don't know how to trade, so they are constantly surprised when the market moves one way or another. All they can do is "trust to their system" and hope that it sees them through the choppy seas that are market conditions. They do this by trying to take every trade and having faith that it will work out. This is because their market understanding is lacking, and when that life-preserver called their system starts to break, they are screwed. But that's not because markets are random. It's because they suck as traders.
Fundamentally, at its core, the market always does the same thing. It goes through periods of ranging activity, and then periods of trending activity. That's it. It doesn't do anything else. If you understand the true principles that drive this activity and detect as the market transitions between one state and another, that cannot be taken away from you.
You combine that with your "shut off" switch, and you have a successful trader. When you don't, you have people who come on message boards and complain about the randomness of the market and say that those who have succeeded have only done it through luck. Amazingly, these total idiots don't seem to understand that it is statistically impossible for there to have been so many successful traders with runs of "luck" that lasted as long as they did (many of which are still going). They should go back and learn high school math, but I guess that's beyond the ability of their tiny little brains to comprehend.
