Why do noobs make money?

[Outernationalgg]

surviorship bias. you only hear from the noobs who makemoney, the others quit. good thread

 

[LeeD]

Quote from 1prometheus:

noobs typically:

-add to losing trades
-take quick profits
-ride losses
-prefer to only sell when the trade is showing a gain.

So using this strategy the noob is often able to make a string of winning trades. It is called manufacturing a winning streak and is a popular betting method at the casino.

To illustrate the point here is a simple probability exercise.

Imagine a trader flips a coin, if he sees tails he wins $100 and if he sees heads he looses $100. This is pretty much how it would work for a trader who just places trades randomly. This assumption ignores transaction costs but they usually start to matter in the long run, not when one does just a few trades.

The trader terminates when he gains $200 (2 more winning trades than loosing trades) or when he suffers a large enough loss that he cannot tolerate (that would be daily stop-loss). The attached chart illustrates the probability of walking away with $200 as a function of "intolerable" loss.

As you can see from the chart, if the "intolerable" loss is "reasonable" $500, the chance of walking away with the desired $200 is 71%. That means that more tha 2 in 3 or 7 in 10 clueless newbies will walk away with a profit after their first trading day.

If the trader can tolerate as much as $900 loss (which makes $1000 intolerable) the chance of walking away with $200 profit is as high as 91%.

 

[SarahNGuyen]

clever post leeD