(Why) do most traders lose?

[Don Bright]

Quote from Algorithm:

I actually agree, to a degree. I fully agree that to just back test in a vacuum and not take into account tax policies, price of gold, geopolitics, dividends, interest rates, market psychology etc............... Is just back testing for the sake of back testing. I also think there's too much emphasis on rigid trading "systems" as well.

I personally think that at some point trading becomes an ingrained process and instinctive. That's not to say that there aren't things/indicators a trader should use, but those are just pieces of the puzzle and can often serve as points of fascination/distraction from the 'big picture". When it's all said and done, this isn't a pure scientific/mathematical practice. There is a lot of art to this game.

Yep, the "art" is what makes the difference between a good trader and a great trader....

All the best,

Don

 

[Cheese]

Quote from Don Bright:
I know I'm going to get a bunch of flak about this comment, but backtesting is of little value for most trading strategies and decisions, IMO. To do so properly, one would have to take into consideration so much peripheral data that it would become onerous. ..
Don

You are so right.

Backtesting which is usually and basically done on OHLC data is at best very incomplete and at worst delusional as to the so-called results which are produced.

 

[taowave]

Quote from Algorithm:

I actually agree, to a degree. I fully agree that to just back test in a vacuum and not take into account tax policies, price of gold, geopolitics, dividends, interest rates, market psychology etc............... Is just back testing for the sake of back testing. I also think there's too much emphasis on rigid trading "systems" as well.

I personally think that at some point trading becomes an ingrained process and instinctive. That's not to say that there aren't things/indicators a trader should use, but those are just pieces of the puzzle and can often serve as points of fascination/distraction from the 'big picture". When it's all said and done, this isn't a pure scientific/mathematical practice. There is a lot of art to this game.

I agree with your assessment.i think systems have a fairly short shelf life,and in the long run system trading is a zero sum game.

However,I think everyone backtests in one manner or another,whether it be visually or with computer.In a sense,all you can do in an uncertain world is try to assess ones odds and the probability of an event happening.Backtest and simulations give you the best insight into that distribution,and proper money management protects onself from the adverse tail move...

 

[McCloud]

Here is a thread from 2003 on the exact same subject...

http://www.elitetrader.com/vb/showt...t=why do most traders lose money&pagenumber=1

The poll is almost very similar, it is interesting that the majority voted for discipline in both polls....

 

[fttrader]

Quote from Don Bright:

I know I'm going to get a bunch of flak about this comment, but backtesting is of little value for most trading strategies and decisions, IMO. To do so properly, one would have to take into consideration so much peripheral data that it would become onerous. History, only adapted to current interest rates, current "global" conditions, gold, oil, war....and then overall volatility....dollar valuation, etc. etc. Simply reading what "was" without all the reasons for "why" it was, seems like a false reading to me.

However, backtesting to see how Specialists handle such things as opening prices, MOC's, intraday gaps, etc., would be of some benefit.

Just MHO.

Don

I think we need to make a distinction between backtesting and optimization or curve fitting. As a means of evaluating whether a set of trading rules can work, surely backtesting is required to help make a decision. For example, if the newbie thinks that buying the cross of 2 moving averages can make him money, he only has to backtest to realize that purely trading such a system will fail. It has then served its purpose.
To rely solely on backtesting to formulate a trading plan, however, can be detrimental.
When backtesting starts to incorporate a myriad of variables is when it becomes useless.

 

[a529612]

I've heard Steve Cohen said his top traders only have a 55% edge of winning. What's the probability for an average trader?

 

[maxpi]

Quote from kiwi_trader:

Its a given in the industry that the majority of traders lose. Whether its absolute "I blew $400,000 and I'm out" losing or just the "I can't make this work and I'm closing my account" we get told that 90-95% of new traders will lose and be out of the business in short order.

Identifying why might help some of the newer ET members (no, not your new alias) to avoid a few of the pitfalls.

So, experienced traders, and less experienced traders who are identifying some issues: why do most traders lose?


My pick for first reason: trading: they never had a fully tested systematic way of trading in the first place.

I fully agree, if i had started trading with real money when I first looked at trading, psychology issues would have been a big thing, and in fact they were so I quit trading and took up study. After years of studying trading it is not about psychology, not even a little bit. If you have a good system and it is working day in and day out what is to get you upset?

People can't execute their systems because they don't trust them, the answer to that dilemma is to learn to trust the system by understanding it, not to force your fears and distrust down somewhere where it can't bother you.

 

[kiwi_trader]

Quote from McCloud:

The poll is almost very similar, it is interesting that the majority voted for discipline in both polls....

Interesting. And interesting what Maxpi says about this.

I think that the poll result reflects where most poll answerers are at currently but that Maxpi's answer is correct. I was rereading some Mark Douglas material earlier this week and he said that discipline was something you needed when you were changing your beliefs.

So once you really truly believe in your system you won't need the discipline. You'll only need it during transitions while you build up your new belief and behavioural habit. Isn't that a relief

 

[hans37]

The answer depends upon the nature of the market traded.

In futures most people lose because they must. the system demands it.

 

[kiwi_trader]

Hans,

You seem to be saying is that futures is tougher than stocks. But how does that change the answer?