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Easy Losses, Hard Profits
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Easy Losses, Hard Profits

  #1 (permalink)
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Easy Losses, Hard Profits

Has anyone thought about how very easy it is to lose money trading but at the same time so very hard to make profits. It just seems to me that trades go bad at the drop of a hat but realizing profits is like pulling teeth.

You would think that if the market is a 50/50 probability most of the time then profits should be just as easy as losses.
It's like the markets are somehow magically setup to make the most people lose. There has to be some human psychology in there some where.

As an experiment I decided to trade in simulation classic technical analysis strategies like breakouts, range reversals, pullbacks etc. on the ES with 2 point stops and 3 point targets, with a 50% win rate this should be profitable. The results were very disappointing. Strings of 4-5 losses in a row were common but 2-3 winners in a row were few and far between.

Seems to me that the ES at least is gamed to prevent winning strategies based on classic technical analysis. One would be better off learning all the traps and fake outs in the market that true technical analysis.

Just rambling, would be interested in what others think.

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  #3 (permalink)
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Bid/ask spread + commission, not factoring in any other technology costs or your time, you have fixed costs for every trade regardless of outcome that make your losses more painful and your winners less profitable.

This is why I personally prefer to trade at a lower frequency, higher time frame charts, bigger size but less of them overall. Whereas it seems most people instead are taking tons of tiny trades all day, spinning their wheels, I may take only 2 trades a day per instrument on futures, and less than that on equities.

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  #4 (permalink)
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Seahn View Post
Has anyone thought about how very easy it is to lose money trading but at the same time so very hard to make profits. It just seems to me that trades go bad at the drop of a hat but realizing profits is like pulling teeth..

Yes I agree. As futures traders we aim to set smaller stops for larger profits. The problem here is each time the trade goes in red by a small amount we have a realized loss (stop), but each time the trade goes in green by same small amount we don't realize the gain. This unrealized small gain is still subject to turning to zero (BE), becoming smaller gain or reverting to hit stop, before reaching the target if it does. This gives Mr. Market an advantage -- like clockwork it takes the small but certain money from us vs us waiting for bigger but more uncertain money from the market.

I think there are two solutions. One is setting target by same amount as the stop. This way you do what Mr. Market do to you -- taking the small but more certain money. The other is like what Mike suggests, taking very infrequent trades with larger size and larger profit. Both require overall good degree of accuracy in reading the direction of price at least for the moment. I personally prefer the second, but it is easier said than done sometimes. It would be interesting to try the first solution though (I haven't yet); despite it goes against the general principle that target should be larger than stop, it is also much more certain you will book a profit.

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  #5 (permalink)
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It would seem like 50/50 and toally gamed to a beginner. I felt exactly the same way the first time I tried out a
daytrade on a forex or future market. re: price not reaching profit targets cleanly, the markets are probably much more efficient.(even though small retail trading is still a relatively small segment of the participants) The ES is very popular with a lot of participants. Many are taking profits or uncertain buying/selling in the "retracements". I would agree it's still "gamed" to some extent as the big money often knows where a majority of stops are , methodically or psychologically based , most often taking out stops and continuing on the original move.

The market may be harder than it was in the past for the average retail trader. Some current reported facts
of the trading markets:
50% of stocks and bonds are owned , invested or traded by the 1%. (could be big firms and funds trading for the 1%, as well as investment banks with their armies of traders human or automated)
80% of all transactions today are done by HFT firms with whatever kind of volume liquidity or illiquidity or
volume vs. "true volume" results.
Electronic trading has taken over most trading since 20 years ago.

There are still ways to learn how to trade better than 50/50. Recognizing higher timeframe participation by the "big
money" can help. Some of the popular methods to learn about that are market or volume profile, and s/r "levels". Some popular authors on profile are Dalton and Steidlmeyer. Learning how the "herd" reacts generally to price movement i.e. price action. Some popular materials are Brook's price action or PATs.
A higher time frame may help with identifying the trend movement of the "bigger money" , other-timeframe-participants (OTF)
but then again there is the drawback of having to risk more with larger tickwise stops for the small retail trader.
And then some are willing to scalp based on their skill with price action and/or completely with their skill on watching
orderflow, time/sales, and/or footprint.

But yes, the old traditional methods of just relying on moving average crosses, lagging oscillators, or waiting for fib targets and retracements are probably harder to trade profitably with , are almost made irrelevant by themselves without extra situational context where one can get better at learning to read with experience. I have seen Linda Rashke's old book "street smarts" and most of that stuff for trading in the 80's imo doesn't work at all today. And her webinars are entirely different from that old book. And remember as traders, we are still grouped as "speculators", the "evil gamblers" news doesn't like, society at large doesn't like (even though most every other neighbor in your middle-class neighborhood is most likely trading/investing something behind private closed doors!) even though as small retailers the odds are really more against us than the big money of which some is helped/enabled by the gov't.


Last edited by Cloudy; August 17th, 2013 at 03:59 AM.
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  #6 (permalink)
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Humans tend to trade with an imbalanced view to the market:

"Low will for risk - but extra high expectancy for wins"
leads to a painful experience of taking MANY onforeseen losses
and rarely to reach the often unreal winning goals.

Stop loss settings are key here:

Try to optimize the SL settings (more like a desaster stop than
to be trapped by market noise) can bring trading from
consistent losses to being consistently profitable!
That done gives a huge self-confidence: taking losers
like the winners without being upset plus being aware that the
markets tomorrow still will be there.

GFIs1

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  #7 (permalink)
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Seahn View Post
Has anyone thought about how very easy it is to lose money trading but at the same time so very hard to make profits. It just seems to me that trades go bad at the drop of a hat but realizing profits is like pulling teeth.

You would think that if the market is a 50/50 probability most of the time then profits should be just as easy as losses.
It's like the markets are somehow magically setup to make the most people .

I have been thinking about this quite a bit lately.

And I believe that somehow the key to succesful trading has something to do with finding a way to make money with the unexpected, while keeping losses small with the help of the expected.

Normally one would think just the opposite. Somehow everybody knows, that the market is not completely predictable. We can only try to find certain points in "time and price" where we can predict with a better than random outcome. This is thought to be our edge. So in basic we try to make money with the predictable (to a little degree) part of the market, while trying not to get hurt by the unpredictable. Therefore we use stops etc.

But perhaps this is just not the way it really works. It seems to me that this kind of edge is too small to make any significant amount of profit.

So perhaps one should try make money from the unpredictable part. This would mean to enter the market at points with definable risk, but not exit it on the same timeframe for example. This could mean to let the winners run, even if there is an exit signal on the same timeframe, because of the chance that this exit signal (which could be an entry signal for the opposite direction etc.) fails, and the market runs even further.

Trading beginners tend to be irrational with losers. They don´t set a stop loss, or push it further and further, because they hope the market will turn back. Sometimes this will work, but sometimes it does not work, and these losses, which were based on hope and irrationality kill the account.

If we turn this concept around, we should be totally rational and analytic in placing stops and keeping them, but we should be much more irrational in not taking profits too early. This should result quite some time in letting winners turn into loosers, but accompanied with huge winners from time to time. Winners that big, that there are significant profits over time.

I think it is important to realise, that this kind of being profitable will always have a taste of irrationality or luck etc. to it, instead of the feeling that one knows exactly what one´s doing. And this is of course not the way of thinking one would like to have when dealing with money and the majority of people would think it to be wrong, but then...the majority of people looses money in the market.

I would appreciate, if some consistently winning discretionary traders share their experience here. It would at least explain, why trading is so hard to teach, because it would mean to teach exploiting one´s luck without loosing the shirt.
This is very different to teaching some rational analytical strategy to extract profits out of a chaotic market.

With kind regards

TraderTed

"A chap who speculates- let this be said-
Is very like a beast on moorland dry,
That by some evil spirit round and round is led,
While fair, green pastures round about him lie."
v. Goethe (Faust)
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  #8 (permalink)
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TraderTed View Post
We can only try to find certain points in "time and price" where we can predict with a better than random outcome. This is thought to be our edge. So in basic we try to make money with the predictable (to a little degree) part of the market, while trying not to get hurt by the unpredictable.

I actually think this is the key right here - when we think like this as you rightly say we believe we can predict a turn at an interesting point, however our ego gets in the way of waiting for evidence and it also helps foster the gun jumping mentality of catching knives and shorting rockets.

So by approaching from your perspective I think that would foster a more seasoned mentality of catching more of the middles of trends (and thereby the possible unexpectedy large run profits) rather than wasting powder in early shots because we think we can predict anything.

I know from my own results over the years that when I wait and then enter in low volatility I can then get very profitable exits in high volatility, doing it the other way around has not been so fruitful. As an example of this possibly the best trade I made many years ago was a 20 point dual stop straddle across a quiescent Dow while my son and I went out for a curry. Max risk was -40 points in case of whipsaw, likely risk was -20, we came back an hour later to find +120. I knew that I couldn't predict anything other than that something was likely to happen, maybe that's a good example of what you describe, though not one of the trend following variety.

Thanks for the thoughts, I think they have great merit in helping to change our attitude towards the importance of what we see rather than what we think we can predict.

Travel Well
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Seahn View Post

Seems to me that the ES at least is gamed to prevent winning strategies based on classic technical analysis. One would be better off learning all the traps and fake outs in the market that true technical analysis.

It all depends on what market you are trading. The ES is the most popular based on volume, so retail traders flock there. It's also where the biggest, strongest, best and smartest funds/algo's are lurking. When you trade the ES, you are choosing to go up against the best of the best. It does not get any more difficult than that IMO.

Your post makes perfect sense to me, which is why I don't trade the ES anymore. There are plenty of other markets to trade, unless of course you need to move 100+ contracts a clip.

There are markets, such as the ag's, oil, metals and currencies that do move quick and can produce instant profits. I know your frustration b/c I was there too, but once I said adios to the indexes, my trading improved dramatically. My favorite market currently is Soybeans and IMO it's very technical and provides plenty of excellent moves intraday. Since Soybeans trades in same tick intervals as the ES, it's a very easy comparison for me. My profit target on Soybeans is 3 points - and it can hit that in the blink of an eye. The only time you'll see the ES move 3 points that quick is around news; otherwise, get ready for the uneven choppiness.

Try pulling up other markets and see how they look to you - soybeans, oil, gold, silver and natural gas are a good place to start.

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  #10 (permalink)
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Market may seem like 50/50, up or down, but in reality:

- Most traders end up "scalping", primarily due to a fear of loss
- Scalping has enormous expenses associated with it
- If you "scalp" for 8 ticks and your stop is also 8 ticks, you pay a 1 tick bid/ask spread to enter the position, and you pay roughly 1/2 a tick in commissions
- This means on trades where you hit your target, you are keeping only 80% (expenses are 20%)
- This means on a trade where you take a stop, you are losing 100% plus expenses of 20% or 120% total

Winners = +80%
Losers = -120%

I realize scalpers will disagree with me and they have their reasons. To each his own.

There is a good discussion here:

https://futures.io/traders-hideout/23792-who-makes-more-money-scalpers-point-traders.html

I am not a scalper. By increasing your risk and reward size, you are increasing your efficiency in the market (each trade is less expensive). Scalpers will argue that you are also giving up more trade opportunities, which have a cost associated with them (missed opportunity cost).

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
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4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
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