Success and Failure in Trading

[UrmaBlume 10]

Success in the markets is not about instinct, divine inspiration or spontaneous intellectual combustion. It is about intelligent data processing, sound method and the management of risk and resource that is both effective and adaptive to change.

 

Why the high failure rate in trading?

 

Most new traders fail and so do most new businesses. While the failure rate for new traders is probably even higher than the failure rate for new businesses, the reasons for these failures are mostly the same.

 

The two most common causes of failure among both new businesses and new traders are under capitalization and lack of domain expertise/education/understanding.

 

As to capitalization, the minimum requirements for successful futures trading is full margin + maximum negative departure + one standard deviation of expectation.

 

That formula assumes a positive expectation. Without that positive expectation - the capital requirement for a losing trader or business is infinite.

 

Expectation is one of the prime determinants of capitalization and domain expertise/education/understanding is a prime determinant of expectation.

 

Consider the requirements in time, money and self to become a medical doctor and then note that the most successful traders make far, far more money than the most successful doctors.

 

As capital requirements are inversely proportional to expectation which means that the very best require the least capital, one distinction between winning and losing players is defined by losers trading highly leverage forex and ES traders with only a few thousand dollars per contract - neither has more than a pennies on the dollar chance of success.

 

Considering domain expertise/education and understanding, imagine in your mind a complete description of those few that make all this money. What does their shop look like, how is it equipped, what is the speed and flow of their data, what is the collective education, experience and resource of the people in those shops that design the systems and methods that produce all of those billions of dollars.

 

Now imagine in your mind the resource, education and experience of the average individual trader - make the comparison and you have your answer.

 

UrmaBlume

Edited September 16, 2012 by UrmaBlume

[wrbtrader 10]

...Consider the requirements in time, money and self to become a medical doctor and then note that the most successful traders make far, far more money than the most successful doctors...

UrmaBlume

 

The most successful retail traders do not make more money than the most successful doctors. In contrast, the most successful professional traders (those working for a firm or institution) do make more money than the most successful doctors...

 

Assuming you're comparing their life earnings, endowments, bonuses et cetera.

 

By the way, a little off topic, I remember an advertisement (a few years ago) by Google looking to hire bond traders. Google wanted to have its own (in house) trading group that has now branched off into other markets besides bonds. Google is not the only company doing such...will this be the new type of wall street someday ?

Edited September 17, 2012 by wrbtrader

[SIUYA 11]

To keep things in perspective about any business and this can be particularly applicable to trading.

'''''''''''''''

There is the theory of good and bad capital.

Professor Amar Bhide "Origin and Evolution of New Business"

Paraphrasing here......

93% (a familiar number) of all companies that ultimately become successful have to abandon their original strategy. because the original plan proved not to be viable.

In short - successful businesses succeed not because they have the right strategy at the start but because they have money left over after the original strategy fails and they can survive to try another approach. Most who fail, fail because they spend all their money on the original strategy which is usually wrong.

The theory of good and bad capital demands that new companies figure out a viable strategy as fast as possible, and with as little investment as possible - in order to survive for the long term. there is a sacrifice between profits and growth here for businesses.

Initial investors should be patient for growth and impatient for profits

Once a viable strategy has been found, then they should look to growth

 

''''''''''''''''

With trading there is no excuse if you have a strategy that you have not tested and found to be successful you are almost doomed to fail, and this can be done only with the cost of time, and initially small amounts of capital.

the good capital is spent in time, and development, the bad capital is spent in chasing unprofitable strategies.

Another reason IMHO for why if you are starting out and decide to spend more than (a number pulled from thin air) 10% of your initial trading capital upfront on a system/mentor/educator or such you are likely to increase your chances of failure.

(Not saying anything here about vendors good or bad, but as a value judgement on what they may be worth as part of the capital a trader has to use)

 

''''''''''''''''

Plus adding to what wrb says - yes the most financially successful doctors either probably work for a larger institution or made most of their money out of their business skills in setting up clinics etc rather than being a doctor.....could be same for almost any profession or business.

[wrbtrader 10]

To keep things in perspective about any business and this can be particularly applicable to trading.

'''''''''''''''

There is the theory of good and bad capital.

Professor Amar Bhide "Origin and Evolution of New Business"

Paraphrasing here......

93% (a familiar number) of all companies that ultimately become successful have to abandon their original strategy. because the original plan proved not to be viable.

In short - successful businesses succeed not because they have the right strategy at the start but because they have money left over after the original strategy fails and they can survive to try another approach. Most who fail, fail because they spend all their money on the original strategy which is usually wrong.

The theory of good and bad capital demands that new companies figure out a viable strategy as fast as possible, and with as little investment as possible - in order to survive for the long term. there is a sacrifice between profits and growth here for businesses.

Initial investors should be patient for growth and impatient for profits

Once a viable strategy has been found, then they should look to growth

 

''''''''''''''''

With trading there is no excuse if you have a strategy that you have not tested and found to be successful you are almost doomed to fail, and this can be done only with the cost of time, and initially small amounts of capital.

the good capital is spent in time, and development, the bad capital is spent in chasing unprofitable strategies.

Another reason IMHO for why if you are starting out and decide to spend more than (a number pulled from thin air) 10% of your initial trading capital upfront on a system/mentor/educator or such you are likely to increase your chances of failure.

(Not saying anything here about vendors good or bad, but as a value judgement on what they may be worth as part of the capital a trader has to use)

 

''''''''''''''''

Plus adding to what wrb says - yes the most financially successful doctors either probably work for a larger institution or made most of their money out of their business skills in setting up clinics etc rather than being a doctor.....could be same for almost any profession or business.

 

Siuya,

 

I think any retail trader that spends 10% or more of their trading capital on books, data, equipment, research, vendors are probably "under capitalized". In contrast, someone that's a professional trader has a salary, bonus performances, pension, medical/dental plans, paid vacations and so on.

 

These are the advantages that professional traders have that most successful retail traders do not have...primary reasons why the failure rate is higher for retail traders because retail traders do not have the supporting cast like professional traders.

 

I also think the failure rate amongst retail traders equals the failure rates amongst small business owners is due to the lack of capital (not properly capitalized) and lack of understanding of operating a business. Too many retail traders don't understand they are self-employed. Therefore, they need to treat their trading like a business especially when their tax government views them as self-employed unless the trader is employed elsewhere at the same time.

 

Eventually anyone will go belly up if their expenses are higher than their income.

[BlueHorseshoe 10]

93% (a familiar number) of all companies that ultimately become successful have to abandon their original strategy. because the original plan proved not to be viable.

In short - successful businesses succeed not because they have the right strategy at the start but because they have money left over after the original strategy fails and they can survive to try another approach. Most who fail, fail because they spend all their money on the original strategy which is usually wrong.

.

 

Even amongst those who have sufficient financial capital remaining to continue after the original strategy has failed, it's another matter whether they have sufficient 'emotional' capital (energy, momentum, enthusiasm, ambition, passion, drive) remaining. Having a business fail is a draining experience.

 

BlueHorseshoe

[SIUYA 11]

By the way, a little off topic, I remember an advertisement (a few years ago) by Google looking to hire bond traders. Google wanted to have its own (in house) trading group that has now branched off into other markets besides bonds. Google is not the only company doing such...will this be the new type of wall street someday ?

 

Plenty do - Ever heard of the Vatican trading room?

 

'''''''''''''''''''''

re undercapitalised - which would you rather have - plenty of capital and a strategy that is not profitable, or a small capital base and a profitable strategy? The point i was making is that often retail traders burn through their capital before getting to a profitable strategy - regardless of how much they have. Why would a trading business be any different to the vast majority of any business?

When it comes to trading, the cost of getting a profitable strategy is pretty cheap compared to other businesses, and yet most still will through good money after bad.

 

To survive and live off it you certainly need to be properly capitalised and business minded enough to pay taxes etc; on top of the first....(my guess is many successful professional traders are not, or dont think enough about this aspect as well if they venture out on their own - if you are a professional and getting paid a good % of what you make, with the support - unless you really have a reason - why leave.), but it would not matter if you dont have a profitable strategy.....and as Blue mentions - enough emotional capital as well as financial capital.

 

(10% was pulled out of thin air as it amazes me when I read someone saying I have $20,000 to trade and I am thinking about going to a seminar on the weekend that costs $5000 - WTF? I would think spending 10% (lets say $10,000 out of $100,000 would be reasonable - at least it wont kill the account.)

[TheDude 10]

Success in the markets is not about instinct, divine inspiration or spontaneous intellectual combustion. It is about intelligent data processing, sound method and the management of risk and resource that is both effective and adaptive to change.

 

Why the high failure rate in trading?

 

Most new traders fail and so do most new businesses. While the failure rate for new traders is probably even higher than the failure rate for new businesses, the reasons for these failures are mostly the same.

 

The two most common causes of failure among both new businesses and new traders are under capitalization and lack of domain expertise/education/understanding.

 

As to capitalization, the minimum requirements for successful futures trading is full margin + maximum negative departure + one standard deviation of expectation.

 

That formula assumes a positive expectation. Without that positive expectation - the capital requirement for a losing trader or business is infinite.

 

Expectation is one of the prime determinants of capitalization and domain expertise/education/understanding is a prime determinant of expectation.

 

Consider the requirements in time, money and self to become a medical doctor and then note that the most successful traders make far, far more money than the most successful doctors.

 

As capital requirements are inversely proportional to expectation which means that the very best require the least capital, one distinction between winning and losing players is defined by losers trading highly leverage forex and ES traders with only a few thousand dollars per contract - neither has more than a pennies on the dollar chance of success.

 

Considering domain expertise/education and understanding, imagine in your mind a complete description of those few that make all this money. What does their shop look like, how is it equipped, what is the speed and flow of their data, what is the collective education, experience and resource of the people in those shops that design the systems and methods that produce all of those billions of dollars.

 

Now imagine in your mind the resource, education and experience of the average individual trader - make the comparison and you have your answer.

 

UrmaBlume

 

Is this going to be another pissing contest from UB? (ie you need all my special indicators to trade like the pros?)

 

This is it folks, so listen up.......

 

The path to success lies in determination and attitude. Not much else.

 

It does not lie in how proprietary your indicator is, how fast your data feed is, blah blah blah.

 

If youve got a sloppy data feed, a pig slow computer, and a dog that barks all day, well I guess you had better be an EOD trader, not a intraday trader.

 

Lets not forget all those self made billionaires. Yes - most of them are self made. They had determination. I personally know traders who have made the big time in a few years too.

 

Sure the odds may be small, but lets not forget all those kids who apply as grads to hedge funds, banks, asset managers etc EVERY YEAR and get turned down. I guess they never succeeded in being a 'pro'. So not everyone makes it as a pro, or a retail trader. You need to include these failed applications in your data sample. I thought you would know that given you pride your self in stats/probability theory.

 

Sorry UB, but I find your stance to be negative. All those things you mention add to small edges, which I agree add up, but if you aint got it in the first place - well you just aint got it.

 

And lets not forget - all the pro's you talk about make 20-30% a year on capital. A day trader will make 200-300% for obvious reasons. A good HF trader may make 1-2mill a year. A good prop/retail trader can make 10-20mil a year. The fact you dont know that means you have shut your self off from opportunity as you dont see what is really possible when your mind is free.

 

Rant over.

Edited September 18, 2012 by TheDude

[BlueHorseshoe 10]

Plenty do - Ever heard of the Vatican trading room?

 

Surely the whole of Catholicism is just a dark pool for "futures", with physical delivery upon "expiration"? Although the Vatican market-makers do look damn smart in those cassocks . . .

 

 

BlueHorseshoe

[TheDude 10]

Surely the whole of Catholicism is just a dark pool for "futures", with physical delivery upon "expiration"? Although the Vatican market-makers do look damn smart in those cassocks . . .

 

 

BlueHorseshoe

 

 

Wot about the Jews? Did you know they actually control all the markets, and are responsible for all the world wars too?

[SIUYA 11]

request - please keep the picture of the little kid that is on the front page of TL with this thread - That should typify all the success and failure threads -- everytime I see it I laugh and think - yep that kids got it - he knows what it is all about.

[zdo 20]

Wot about the Jews? Did you know they actually control all the markets, and are responsible for all the world wars too?

 

If you dig you will find that those few psychopath, inbred ‘jews’ you are talking about do not have control of the judaic churches. However, their ‘italian’ agents do own/control the vatican - via dark pools, dark popes, etc etc…. and are also complicit in the world wars, and just as importantly, in all the ‘small’ wars too.

 

... UB pls pardon wot appears to be WAAAAY off topic ... but it actually has a lot to do with success and failure in trading ...

[SIUYA 11]

... UB pls pardon wot appears to be WAAAAY off topic ... but it actually has a lot to do with success and failure in trading ...

 

I would have thought this sort of of stuff has more to do with success and failure in the afterlife

(those dark pool futures with delivery on expiration - pure gold Bluehorsehoe )

 

..................

but I would suggest all those interested start another thread dedicated to the institutions of religion and their effect on trading - might be interesting controversial and riot inducing. (maybe we could make a u tube video and offend some folks.......)

 

(I only previously mentioned the Vatican trading room as it is definitely one of the larger more unusual non banking trading rooms I know of, plenty of commodity companies, airlines, shipping companies, agricultural companies etc; also have them.)

[kittyraj 10]

The sucessful method in forex trading is Methodology,

Once you choose a time frame, find a consistent methodology. For example, some traders like to buy support and sell resistance. Others prefer buying or selling breakouts. Yet others like to trade using indicators such as MACD and crossovers.

 

Once you choose a system or methodology, test it to see if it works on a consistent basis and provides you with an edge. If your system is reliable more than 50% of the time, you will have an edge, even if it's a small one. If you backtest your system and discover that had you traded every time you were given a signal and your profits were more than your losses, chances are very good that you have a winning strategy. Test a few strategies and when you find one that delivers a consistently positive outcome, stay with it and test it with a variety of instruments and various time frames.

Regards