why this board isn't healthy if you trade for a living
- Thread starter akdrmeb
- Start date
I have to admit that I don't really understand Einsteins relativity theory (although I studied Physics PHD, shame on me) nor do I have the slightest idea what the superstring theory is for.
But nethertheless I would never say that (because I don't understand it) its impossible for very smart persons (smarter than me) to understand.
I think its the same with trading.
Just because some people (maybe even 95%) are manic depressive and fail in trading doesn't mean that there can't be people out there who CAN indeed trade profitable and are mentaly in balance.
But nethertheless I would never say that (because I don't understand it) its impossible for very smart persons (smarter than me) to understand.
I think its the same with trading.
Just because some people (maybe even 95%) are manic depressive and fail in trading doesn't mean that there can't be people out there who CAN indeed trade profitable and are mentaly in balance.
The General
Guest
Malstrom-
Different people have different needs-most of which will be a function of their physical location and their upbringing.
Some like to bend on their knees and kiss the ground-some like to have long hair dangling behind their ears and wear black suits-some like to pretend that their main purpose is to help their fellow man-etc-etc.
Then there are those who like trading. Usually these people, when they get to a certain level lose all interest in other things like mentioned above-as trading the markets can teach a person more about himself than any other endeavor.
So-why do some want to share-well-maybe because they see all the others-as mentioned-for what they really are-and just want to show others what they have come to realize as a fundamental truth in life.
The General
The General
Guest
Traderzones-
Like everything in life-there is a right way and a wrong way to do things.
Most will go for the wrong way-as this is the easiest way-few will go for the right way-as this is the hardest-and even fewer will learn the best way-which is the right way but not the only right way.
It is more like 99.99999%
The General
The General
Guest
Ken-
Your opinion is of no use to you-or anyone else for that matter.
Just because Susan posts something does not mean that she is right-as a matter of fact-if we are to take trading as a comparison-and as this is a trading related site then that is a fair comment-then she is much more likely to be wrong that she is to be right.
When a person let's other people's opinions influence their decisions in life-they are then admitting that they are weak and vulnerable.
The markets do not treat weak and vulnerable people that nicely.
The General
The General
Guest
Topsurfi-
You may not realize it at this stage-but you have taken the first major step in learning what is required to be a successful trader. Very few get beyond this hurdle.
Now-if you want to continue on and discover some more fundamental truths about trading-ask yourself why do people use indicators to try and predict where the price will go to next?
It is actually very very simple-but the majority are so fooled by the spin doctors that they fail to see even the basic truths-which are right in front of their eyes-each and every day.
FWIW-forget about Einstein and your Physics PHD-it is as much use to you in trading as a Pitchfork is for digging a deep hole in the sand.
The General
All you need to know: Day Trading is devastating to your wealth and health.
"The most interesting finding of Odean's research is that traders underperform as a group even after taking out trading costs. On average, the stocks these traders sold outperformed the market, and those they bought underperformed the market. One year after each trade, the average investor wound up more than 9% poorer than if had he done nothing. Two years later, the results were even worse."
Don't listen to the snake oil salesmen; they'll tell you all you need is to believe, then send you a PM with a 'sure fire' system to prosper, for a small fee.
Pay special attention to the Barber and Odean studies (large sample size, well run studies):
http://www.travismorien.com/FAQ/trading/futradersuccess.htm
The Johnson Report on Day Traders
Ronald L. Johnson prepared a report for the North American Securities Administrators Association (NASAA, a consumer protection group trying to keep the futures industry honest) on the success of retail traders. He chose at random 30 accounts (not a very big sample size, I'll agree) from a retail trading firm. You can easily find this report on the Internet, simply by searching for "the Johnson Report" or similar.
This study found that 18 of the 26 accounts lost money. In addition, risk of ruin calculations on the trader's statistics found that in theory, three quarters of the sample were headed inexorably toward failure, with a 100% risk of ruin.
Furthermore, the 8 accounts that were profitable also had a very high risk of ruin. Only three of the eight accounts that made any money had a risk of ruin low enough to imply any significant success as a speculative trader (under 25%). For example one of the winning accounts made 93% of his/her total profit on just one trade ($7,650), without that trade 99 other trades would have netted only $610 in total, indicating that luck may account for much of this performance.
The most successful trader in the group had an average holding period of 47 days, and did not day trade. (The other accounts not accounted for as winners or losers only had a couple of transactions and were not statistically valid).
Conclusions of this study: the great majority of traders surveyed had a risk of ruin so high as to make eventual bankruptcy virtually inevitable. The traders with the shortest time frames (day traders) lost the most money and had the highest risk of ruin.
The report also found that the average holding time for winning trades was much shorter than the holding time for losing trades, indicating that traders were cutting their winners early but letting their losses run.
The study ignored the effects of tax, and did not comment on whether or not the few winners actually performed better than index funds, merely whether they were profitable or not in absolute terms.
The Johnson Report is interesting, but for sheer volume of data Odean and Barber give a much more convincing argument.
Odean's study of stock traders
Terry Odean, then a grad student at the University of California at Berkeley, and his Professor Brad Barber researched the accounts of 10,000 discount-brokerage trading accounts between 1987 to 1993.
Later, Odean repeated this study on a much larger scale, in the repeat he examined the accounts of 66,465 households from 1991 to 1996. So in total, he looked at a huge number of accounts, and a vast number of trades. The conclusions from each study were virtually identical: trading hurts your wealth.
Odean found that as a group all amateur investors underperform the market due to higher than necessary trading costs. But the 20% of traders with the highest turnover underperformed the most. In the sample, while the market went up an annualised 17.1% over the period, the average investor/trader with a turnover of 80%pa returned 15.3%, but the 20% with the highest turnover, 283%pa on average, got only 10%pa.
This study was performed with the clients of a discount (non web) brokerage. How would the figures change for the ultra cheap Internet brokers?
According to Odean, not very much. Commissions were an important part of the reason why active traders had the worst performance, but the main bogeyman was the bid/ask spread. In fact Odean believes that traders as a group are now doing even worse than they did in the old discount brokerage days because turnover has increased even more.
Odean offers the following example: The average trade in his sample was roughly $13,000 in size. Trading through a discount broker, an investor might have paid $60 or so in commissions "round-trip," or $30 for the buy and $30 for the sale. But by Odean's estimate, the typical investor also lost a full 1% to the bid-ask spread -- or $130 on this typical $13,000 purchase.
If this investor switches to an online broker that makes trades for only $10, the "round-trip" cost of the trade falls to only $20 -- but the spread still amounts to a loss of $130, for a total transaction cost of $150.
No doubt $150 is cheaper than $190 but it's only around 21% less, not the 66% that investors might believe that he or she is saving. And even this 21% savings could be swallowed up if investors choose to change their behavior and trade more frequently as a result of the lower commissions.
As a matter of fact, Odean did find a tendency to trade more when traders switched to cheap web brokers. In the second study he examined the trading records of 1,600 traders that switched from discount telephone trading to deep discount web trading. He found that turnover increased by a third and traders doubled their exposure to "speculative" stocks. That is to say that telephone traders were twice as likely as web traders to buy large stocks, compared to web traders that on average concentrated more on small speculative stocks trading on the NASDAQ and other minor exchanges.
The most interesting finding of Odean's research is that traders underperform as a group even after taking out trading costs. On average, the stocks these traders sold outperformed the market, and those they bought underperformed the market. One year after each trade, the average investor wound up more than 9% poorer than if had he done nothing. Two years later, the results were even worse.
Odean found that if the traders had not turned over their portfolios, they would have done much better. In fact as a group they tended to buy small company and value stocks, which at the time were a profitable sector. The stocks they picked on average did in fact outperform the market, but traders snatched defeat from the jaws of victory by systematically selling their best stocks early and holding their worst stocks too long.
Why were traders doing so badly? Odean believes there are several reasons. First, most of the traders were buying stocks that had either risen or fallen substantially in the six months prior to buying. Since there are too many stocks to follow, most traders jump into ones that catch their eye due to their sharp moves or media attention. Momentum traders jump in on the biggest gainers and bargain hunters pile in on troubled issues. In both cases they are dealing in a relatively small number of issues in the public eye, and following a crowd is rarely a successful trading strategy.
Another finding was that the traders in the group had a strong tendency to sell the wrong stocks. Odean says traders "strongly prefer to sell their winning investments and hold on to their losing investments, even though the winning investments they sell subsequently outperform the losers they continue to hold." Selling a loser amounts to admitting you have made a mistake. Traders hate that, they much prefer to sell stocks at a profit, which makes them feel like a winner, as a result traders systematically weeded out good stocks from their portfolios and retained poor ones.
Odean later repeated this research with a substantially larger sample size.
Odean's later study confirmed a strong correlation between the amount of trading investors did and their returns. Hyperactive traders, with an average of 1,000% annual turnover, had just a 11.4% annualized return after expenses. The least-active investors barely traded, changing just 2.3% of their holdings annually, yet they managed a market-beating 18.5% annualized return (the S&P 500 Index was up 16.9% annually during the period). Note that these figures do not include the tax penalty paid by heavy traders.
But what if hyperactive traders tended to pick worse stocks, such that their lower performance was due to this, rather than their trading? Not so, according to the study. Had the least-active traders done no trading, their returns would have only been 0.25% better annually, whereas the heavy traders would have done more than seven percentage points better annually.
Not surprisingly, Barber and Odean concluded, "Our central message is that trading is hazardous to your wealth."
Terry Odean's home page, with most or all of his papers is at http://faculty.haas.berkeley.edu/odean/. It is definitely worth reading through his papers, even if you do intend to trade you'll find his insights into why people were underperforming valuable.
"The most interesting finding of Odean's research is that traders underperform as a group even after taking out trading costs. On average, the stocks these traders sold outperformed the market, and those they bought underperformed the market. One year after each trade, the average investor wound up more than 9% poorer than if had he done nothing. Two years later, the results were even worse."
Don't listen to the snake oil salesmen; they'll tell you all you need is to believe, then send you a PM with a 'sure fire' system to prosper, for a small fee.
Pay special attention to the Barber and Odean studies (large sample size, well run studies):
http://www.travismorien.com/FAQ/trading/futradersuccess.htm
The Johnson Report on Day Traders
Ronald L. Johnson prepared a report for the North American Securities Administrators Association (NASAA, a consumer protection group trying to keep the futures industry honest) on the success of retail traders. He chose at random 30 accounts (not a very big sample size, I'll agree) from a retail trading firm. You can easily find this report on the Internet, simply by searching for "the Johnson Report" or similar.
This study found that 18 of the 26 accounts lost money. In addition, risk of ruin calculations on the trader's statistics found that in theory, three quarters of the sample were headed inexorably toward failure, with a 100% risk of ruin.
Furthermore, the 8 accounts that were profitable also had a very high risk of ruin. Only three of the eight accounts that made any money had a risk of ruin low enough to imply any significant success as a speculative trader (under 25%). For example one of the winning accounts made 93% of his/her total profit on just one trade ($7,650), without that trade 99 other trades would have netted only $610 in total, indicating that luck may account for much of this performance.
The most successful trader in the group had an average holding period of 47 days, and did not day trade. (The other accounts not accounted for as winners or losers only had a couple of transactions and were not statistically valid).
Conclusions of this study: the great majority of traders surveyed had a risk of ruin so high as to make eventual bankruptcy virtually inevitable. The traders with the shortest time frames (day traders) lost the most money and had the highest risk of ruin.
The report also found that the average holding time for winning trades was much shorter than the holding time for losing trades, indicating that traders were cutting their winners early but letting their losses run.
The study ignored the effects of tax, and did not comment on whether or not the few winners actually performed better than index funds, merely whether they were profitable or not in absolute terms.
The Johnson Report is interesting, but for sheer volume of data Odean and Barber give a much more convincing argument.
Odean's study of stock traders
Terry Odean, then a grad student at the University of California at Berkeley, and his Professor Brad Barber researched the accounts of 10,000 discount-brokerage trading accounts between 1987 to 1993.
Later, Odean repeated this study on a much larger scale, in the repeat he examined the accounts of 66,465 households from 1991 to 1996. So in total, he looked at a huge number of accounts, and a vast number of trades. The conclusions from each study were virtually identical: trading hurts your wealth.
Odean found that as a group all amateur investors underperform the market due to higher than necessary trading costs. But the 20% of traders with the highest turnover underperformed the most. In the sample, while the market went up an annualised 17.1% over the period, the average investor/trader with a turnover of 80%pa returned 15.3%, but the 20% with the highest turnover, 283%pa on average, got only 10%pa.
This study was performed with the clients of a discount (non web) brokerage. How would the figures change for the ultra cheap Internet brokers?
According to Odean, not very much. Commissions were an important part of the reason why active traders had the worst performance, but the main bogeyman was the bid/ask spread. In fact Odean believes that traders as a group are now doing even worse than they did in the old discount brokerage days because turnover has increased even more.
Odean offers the following example: The average trade in his sample was roughly $13,000 in size. Trading through a discount broker, an investor might have paid $60 or so in commissions "round-trip," or $30 for the buy and $30 for the sale. But by Odean's estimate, the typical investor also lost a full 1% to the bid-ask spread -- or $130 on this typical $13,000 purchase.
If this investor switches to an online broker that makes trades for only $10, the "round-trip" cost of the trade falls to only $20 -- but the spread still amounts to a loss of $130, for a total transaction cost of $150.
No doubt $150 is cheaper than $190 but it's only around 21% less, not the 66% that investors might believe that he or she is saving. And even this 21% savings could be swallowed up if investors choose to change their behavior and trade more frequently as a result of the lower commissions.
As a matter of fact, Odean did find a tendency to trade more when traders switched to cheap web brokers. In the second study he examined the trading records of 1,600 traders that switched from discount telephone trading to deep discount web trading. He found that turnover increased by a third and traders doubled their exposure to "speculative" stocks. That is to say that telephone traders were twice as likely as web traders to buy large stocks, compared to web traders that on average concentrated more on small speculative stocks trading on the NASDAQ and other minor exchanges.
The most interesting finding of Odean's research is that traders underperform as a group even after taking out trading costs. On average, the stocks these traders sold outperformed the market, and those they bought underperformed the market. One year after each trade, the average investor wound up more than 9% poorer than if had he done nothing. Two years later, the results were even worse.
Odean found that if the traders had not turned over their portfolios, they would have done much better. In fact as a group they tended to buy small company and value stocks, which at the time were a profitable sector. The stocks they picked on average did in fact outperform the market, but traders snatched defeat from the jaws of victory by systematically selling their best stocks early and holding their worst stocks too long.
Why were traders doing so badly? Odean believes there are several reasons. First, most of the traders were buying stocks that had either risen or fallen substantially in the six months prior to buying. Since there are too many stocks to follow, most traders jump into ones that catch their eye due to their sharp moves or media attention. Momentum traders jump in on the biggest gainers and bargain hunters pile in on troubled issues. In both cases they are dealing in a relatively small number of issues in the public eye, and following a crowd is rarely a successful trading strategy.
Another finding was that the traders in the group had a strong tendency to sell the wrong stocks. Odean says traders "strongly prefer to sell their winning investments and hold on to their losing investments, even though the winning investments they sell subsequently outperform the losers they continue to hold." Selling a loser amounts to admitting you have made a mistake. Traders hate that, they much prefer to sell stocks at a profit, which makes them feel like a winner, as a result traders systematically weeded out good stocks from their portfolios and retained poor ones.
Odean later repeated this research with a substantially larger sample size.
Odean's later study confirmed a strong correlation between the amount of trading investors did and their returns. Hyperactive traders, with an average of 1,000% annual turnover, had just a 11.4% annualized return after expenses. The least-active investors barely traded, changing just 2.3% of their holdings annually, yet they managed a market-beating 18.5% annualized return (the S&P 500 Index was up 16.9% annually during the period). Note that these figures do not include the tax penalty paid by heavy traders.
But what if hyperactive traders tended to pick worse stocks, such that their lower performance was due to this, rather than their trading? Not so, according to the study. Had the least-active traders done no trading, their returns would have only been 0.25% better annually, whereas the heavy traders would have done more than seven percentage points better annually.
Not surprisingly, Barber and Odean concluded, "Our central message is that trading is hazardous to your wealth."
Terry Odean's home page, with most or all of his papers is at http://faculty.haas.berkeley.edu/odean/. It is definitely worth reading through his papers, even if you do intend to trade you'll find his insights into why people were underperforming valuable.
I do not concur there is a right and wrong way for everything in life. That only works in mathematics or other precise subjects. 2+2=4 regardless of other's opinion to the opposite.
My point was, that using an example of "free money" and people not taking it is a perfectly normal action, it does not mean they were wrong or foolish. That is what timeshares do. "Free vacation" except you have to listen to marketing pitches and there is often less to the freebie than meets the eye.
On one subject from 10 people, you may have 10 different opinions, and they likely think everyone else is wrong and they are right. Iran wants "peaceful nuclear power" and others want to deny this because they want no atomic bombs in Iran. Each thinks they are correct and the other wrong.
