How is it possible that most traders burn their money so fast when buying stocks is a coinflip?

[Jack1960]

The real culprits are stops and targets. When you use them your expectancy in the absence of an edge falls. Add commissions and slippage, even without leverage, you are at 10% win 90% lose. Add leverage, you burn quickly.

So what should you do?
Your answer will show if you can consistently extract money from the markets

 

[Handle123]

I once had 23 trades in a row that went wrong way in futures market covering 15 different commodities, but it only killed less than 20% of my account. Reason people lose are many, but often lack of knowledge dealing with risk management, they put profits ahead of all the worst things that can go wrong first. You have to have an answers before questions is best. The 24th trade made up all the losses but took few months, but if I had quit, I would not have caught good move. Most people so much time making their system and yet don't back test it on large enough of data, so they don't know what has happened and think what has happened, it will never get worse in future, I can say from experience, it will get worse in the future no matter how much I back test, records are made to be broken.

 

[algofy]

Traders naturally like to buy weakness and sell strength. This behaviour is probably worse than random entry.
Coupled with riding losers and cutting winners this is all deadly.
Also traders naturally like to add to losers instead of adding to winners. So winners are small and losers are big.

Do not under estimate commissions for active day traders, 20 trades a day = 5000 trades a year, that alone could be 50% of the account gone to your broker within six months.

Also cannot under estimate bid/ask spread for some types of day traders
Even a 1tick spread is large if you are aiming for say 20 tick stop with a 20 tick target.
Trade is no longer 50:50 bet when a spread is involved.

Then you also have skid/slippage on fills in fast markets.

And i forget to mention leverage, a day trader can use margin 4:1 in stocks and 40:1 in futures and fx, to destroy the account pretty quick.

1 tick spread on a 20/20 is nothing, stop spreading misinformation.

 

[Zzzz1]

Simple: people over leverage. They don't risk 1 or 2 % of their account balance. Why do you think so many people scream when IB raises its margin requirements for example? Undercapitalized and overleveraged.simple as that.

i mean if you randomly choose a stock and then randomly buy or sell it there is exactly 50% chance the trade will go your way and 50% it will go against you, so if you apply strict trading rules (like leave the trade at 10% (or any other %) profit and not to risk more than 2-3% per trade - how do people burn their money so fast? because with that strategy you will be pretty much breakeven (before broker fees ofc) so you money won't burn straight away for sure

how does it happen? i read the stories of losing deposits in days or hours everywhere

 

[Zzzz1]

Complex answer? If that is considered complex then yes most would not grasp how to trade profitably. BTW, agree with everything you said. Just don't think it's complex. It's pretty straight forward the way you explained it.

How is it possible that most traders burn their money so fast when buying stocks is a coinflip?"

This is a rather complex answer...to answer.
Alot of people have tried to solve this complexity by selling their so-called trading wisdom in books and services to prospective would-be traders ...and yet, more than 90% of them essentially still fail, or get nowhere.

Trading is a risky venture -- and requires certain...balls, and gusto and brains, or common sense.
Sounds easy or fair enough, but alot of people are lacking in those; They should just be longer term investors in the S&P 500, SPY.

I kind of equate being a great trader...to being Christopher Columbus -- Most traders are just Disneyland boat riders.

 

[southall]

1 tick spread on a 20/20 is nothing, stop spreading misinformation.

Its 5% of the profit or loss. Your odds of winning based on a random entry are no longer 50:50, they now become worse than the odds of a random guess at a roulette wheel. (European roulette tables with a single green have a 2.5% house edge, American tables with double greens have a 5% house edge)

Yes if you have a big edge and let your winners run then a 1 tick spread is almost nothing, but the OP is asking why traders might lose even with a random entry.

 

[java]

i like ur comparison but i think i got a better one, being a great trader is like being Arnold in his fitness prime, Why that comparison, because all the tools and resources are out there you just got to apply YOUSELF, eh?

Good point, especially the part about fitness/trading prime. Very important for a trader or an athlete to realize prime is just a period of time. Prime trading is not eternal.

 

[Chris Mac]

Traders naturally like to buy weakness and sell strength. This behaviour is probably worse than random entry.
Coupled with riding losers and cutting winners this is all deadly.
Also traders naturally like to add to losers instead of adding to winners. So winners are small and losers are big.

At least someone who understands how the game works!
This game can work if and only if losers stay losers, new entrants become mostly losers, and winners are few.
If not, game is dead. This is why IMO internet poker is dying. Losers lose less and less, thanks to AI. What is the interest for winners? Cake is too small.
Maybe trading would be dead too if losers make less and less mistakes thanks to AI ?
Obviously, this is not tomorrow : markets are quite more difficult to modelize than Texas Hold Them !

CM

 

[Fair Value]

i mean if you randomly choose a stock and then randomly buy or sell it there is exactly 50% chance the trade will go your way and 50% it will go against you, so if you apply strict trading rules (like leave the trade at 10% (or any other %) profit and not to risk more than 2-3% per trade - how do people burn their money so fast? because with that strategy you will be pretty much breakeven (before broker fees ofc) so you money won't burn straight away for sure

how does it happen? i read the stories of losing deposits in days or hours everywhere

The reason is the normal distribution of returns. Let's suppose you want to bet only on the long side. For every 10% up move, there is going to be 5 2% down moves or 3.333 3% down moves on average in the long run, so you're still 50/50. Your betting scheme is not going change the expectation of the game. And that does not include transaction costs.

 

[ET180]

It's actually pretty easy...options. With enough leverage, it's possible to lose just about any amount of money in a matter of hours or minutes. Same as going to Vegas and putting it all on red.