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If 90% of traders fail, why not just do the opposite?
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If 90% of traders fail, why not just do the opposite?

  #11 (permalink)
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Seems like I read an article somewhere, where a group of Chinese brokers did a study on several thousand "daytrading" accounts.

Seems like the 90% (losers) rule held, and the one thing they noticed was that the losers lost more on their losing trades than they made on their winners, and vice versa with the 10% winners, they made more on their winners, than they lost on their losers.

So, maybe the ( 2-1 or 3-1) win/loss ratio we get preached to us so often is really quite important?

If I find the article again, I'll link to it.

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  #12 (permalink)
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Most traders fail because of emotion.

If you get stopped out 2 trades in a row it is very difficult to pull the trigger on that 3rd trade. Conversely, if you have 2 winners in a row the pressure is off and jumping into that 3rd trade is very easy. Too easy perhaps.

And that is why trading strategies have become so popular, emotion is removed from the equation. The computer doesn't care how many losses in a row occurred. It only executes defined rules that have been programmed.

In the end, that is what we all strive for, to trade like a computer. No emotion, just execute.

So instead of trading the opposite of your current system, let a master trader borrow it for a few days and watch them make good money with it.

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  #13 (permalink)
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benbrooke View Post
i really dont understand how its possible for 90% of the traders failed .
were do you get these number from? is this a myth

i am saying that only because i think that with today traders education and sites like THIS!!! help traders not just to follow indicator and actually understand what they trading

if you trade with automated system maybe you will failed as a trader but if you trade and follow the your rules and have a good money management , you will get it!

ben


respectfully disagree with this post.... probably some of the MOST successful strategies are automated strategies....

at the end of the day education, websites, etc makes 0 difference... boils down to the confidence in the trade and if you can manage risk appropriately...

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  #14 (permalink)
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Big Dog

Thank for your post ,

from my trading experience with trading system which i created and bought and even use system from manage futures they ALL fails or yield very low results

Maybe you had a better experience with trading system please do tell

as for education and website - again my experience on futures.io (formerly BMT) i see how traders are growing here , i personally talk to a few people here and hear how this site help them to stay focus , stick with system , not over trade etc.... and this bring confidence in trading

ben

Keep on sowing your seed, for you never know which will grow -- perhaps it all will.

-- Albert Einstein
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  #15 (permalink)
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Ben,

i'll followup to this post with an example of an automated system that works extremely well which i use on X_Trader's API... and is very very simple (nothing more than simple order management) i just need to draw up a picture in ms paint to illustrate what i am talking about... essentially its a mean reversion setup, buy on the way down, sell on the way up... scalp for 2 to 3 ticks at a time on the ES, about 5-6 on YM and NQ... you'll easily see 50 to 100 trades a day on 1 lots so commissions will be an issue unless you lease or own a seat...

but in general, in my experience, the most important thing i've learned in terms of managing a trade is having confidence in your system and not wavering in your position even if you take some heat..

thats not to say that you'll let it get really ugly (discipline and experience helps you know when to cut your losses and walk away until tomorrow)... but at the end of the day, being reasonably capitalized so you can absorb those big hits, along with have confidence in your system are keys....

i agree with you, confidence can be gained via different learning tools.... but at the end of the day nothing will beat trial by fire... maybe start with 1 lots and as you build P&L move from there....

i apologize for not going into further detail with the scalper right now... its getting late here and with quadruple witching tomorrow... i'll further illustrate shortly...

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  #16 (permalink)
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Why not do the opposite?

The question implies that trading is a zero-sum-game. This is not the case. So one of the opposites would be not to trade, which would be a winning approach for 90% of the traders.


Three major reasons for failure

(1) No rules that provide an edge: Trades will at best cancel out and you will just be left with the commissions to pay. The harder you try the more commissions you generate, hard work leads to overtrading and further losses.

(2) Lack of money management and discipline: Many traders are overleveraged and do not manage risk in appropriate ways. The broker comparison on this forum includes a comparison of margins required. This should be a non-criterion, or does anyone really intend to use the leverage offered by the brokers? A lot of martingale strategies will work for a while, but the first black swan event will blow the account.

(3) Loss aversion: Instead of taking small losses, many traders average down their positions and thereby increase the risk when the market has already rejected their entry scenario. I believe that loss aversion is the greatest threat to any trader, and if you look at the financial disasters created by Nick Leeson and Jérôme Kerviel: They multiplied the damage to their employers by not taking losses, when it still was possible, but were highly creative in hiding the losses from the reporting systens.



Doing the opposite


For (1) and (2) there is no "opposite", but you need to do your homework. Develop a system with an edge, prove it to yourself, believe it and make sure it comes with proper money management rules. But the third and most important reason for failure gives us a clue.


How to profit from loss aversion

Let us assume that we are in a downtrend and there is a trader with a long position that shows a loss. Correct reaction would be to close out this position (=sell), but instead of selling he averages down (=buy). Sometimes this behaviour will drive prices back into the trading range, and the trader will cover at break-even. This will bring relief from the pain. Sometimes the losing traders are overthrown and the bears gain control (=breakdown on high volume). Now the trend will run until most of the longs are forced to liquidate their position (= capitulation or selling climax). The refusal to liquidate their long positions will actually extend the trend. Human behavior drives feedback mechanisms, positive feedback generates or extends trends.


Here are the conclusions

(1) Let your profits run until you have noticed capitulation or the start of accumulation or distribution. Key is volume and price, you will watch out for climax bars, churn bars or an extended trading range.

(2) Instead of averaging down you might want to add to your position, when the market has validated your entry signal by moving into the right direction.

Pyramiding was used by the Turtle Traders as part of their original trend following approach. I believe that pyramiding cannot be applied to every trading strategy, but it can be useful, if you expect a larger move. Also the second entry should have a higher probability than the first one to compensate for the reduced profit potential.


Last edited by Fat Tails; March 26th, 2010 at 06:49 PM.
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  #17 (permalink)
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Fat Tails View Post
The question implies that trading is a zero-sum-game. This is not the case. So one of the opposites would be not to trade, which would be a winning approach for 90% of the traders.


Three major reasons for failure

(1) No rules that provide an edge: Trades will at best cancel out and you will just be left with the commissions to pay. The harder you try the more commissions you generate, hard work leads to overtrading and further losses.

(2) Lack of money management and discipline: Many traders are overleveraged and do not manage risk in appropriate ways. The broker comparison on this forum includes a comparison of margins required. This should be a non-criterion, or does anyone really intend to use the leverage offered by the brokers? A lot of martingale strategies will work for a while, but the first black swan event will blow the account.

(3) Loss aversion: Instead of taking small losses, many traders average down their positions and thereby increase the risk when the market has already rejected their entry scenario. I believe that loss aversion is the greatest threat to any trader, and if you look at the financial disasters created by Nick Leeson and Jérôme Kerviel: They multiplied the damage to their employers by not taking losses, when it still was possible, but were highly creative in hiding the losses from the reporting systens.



Doing the opposite


For (1) and (2) there is no "opposite", but you need to do your homework. Develop a system with an edge, prove it to yourself, believe it and make sure it comes with proper money management rules. But the third and most important reason for failure gives us a clue.


How to profit from loss aversion

Let us assume that we are in a downtrend and there is a trader with a long position that shows a loss. Correct reaction would be to close out this position (=sell), but instead of selling he averages down (=buy). Sometimes this behaviour will drive prices back into the trading range, and the trader will cover at break-even. This will bring relief from the pain. Sometimes the losing traders are overthrown and the bears gain control (=breakdown on high volume). Now the trend will run until most of the longs are forced to liquidate their position (= capitulation or selling climax). The refusal to liquidate their long positions will actually extend the trend. Human behavior drives feedback mechanisms, positive feedback generates or extends trends.


Here are the conclusions

(1) Let your profits run until you have noticed capitulation or the start of accumulation or distribution. Key is volume and price, you will watch out for climax bars, churn bars or an extended trading range.

(2) Instead of averaging down you might want to add to your position, when the market has validated your entry signal by moving into the right direction.

Pyramiding was used by the Turtle Traders as part of their original trend following approach. I believe that pyramiding cannot be applied to every trading strategy, but it can be useful, if you expect a larger move. Also the second entry should have a higher probability than the first one to compensate for the reduced profit potential.

This sounds like really sensible advice. Thanks Fat Tails.

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  #18 (permalink)
Fortitudo et Honor
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In order to be successful, you have to overcome 3 things....

1) Edge. Obviously that's been covered above. It's not an easy thing to develop an edge.

2) Commission burden. If you need proof why the vast majority are not making money (long term) just look at the brokerages and the numbers they're raking in. They don't make casinos or sports books or brokerages to give away money.

3) Slippage. In distillation, the amount of alcohol that's lost during storage is called "The Angel's Share."

The second two are why the contrarian or inverse strategy isn't always effective. You can find a strategy that has a consistently negative performance, but when you reverse the polarity and do the opposite, you can find it too loses money, just not as much....why? Commission and slippage...it's always working against you.

I would say that the reason that MOST traders aren't successful is the same reason that most gamblers aren't. It's simply a matter of time. The market (house) is infinitely large and can withstand whatever blow you give to them, so maybe you make some money for a little while.....all the market needs to take you to zero is for you to keep going, and keep risking, until eventually, you fail.

MOST traders take bigger and bigger risks. Just like most people change their lifestyle and increase their expenditures when they get wealthy. Instead of enjoying the additional income through security and insurance, they increase their lifestyle consumption and that's why you end up with 79% of NFL players being bankrupt eventually. If they simply lived the same way, they could live "normally" for life....but alas, they buy cars and homes and boats and make all sorts of stupid decisions.

Traders are the same way....as they win....they increase their position sizes.....so essentially, they either maintain the same risk level or actually increase it. In the end, the market just needs you to screw up a few times successively before you're back in the poor house.

There are several other contributing factors......inadequate capitalization (which forces excessive risk strategies), improper trade risk management techniques (like simple stops in place), etc, etc, etc.

It takes a trader who understands money management, who understands risk management, to be successful in the long term.

Again, trading is simply sophisticated gambling. Eventually, the house's capital and their bankroll win on MOST people because they simply need them to play long enough and they'll screw it up. I think a good number (if not the majority) of traders make money for at least SOME period of time....but to do it CONSISTENTLY is a whole other level.

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  #19 (permalink)
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hondo69 View Post
If you get stopped out 2 trades in a row it is very difficult to pull the trigger on that 3rd trade.

So true. And also when you get out of a position at a good level and feel like a weight has been lifted and you can take a breather - that's when it can be the most important time to be involved for trying to capture some of the reversal.


Jugador View Post
Seems like the 90% (losers) rule held, and the one thing they noticed was that the losers lost more on their losing trades than they made on their winners, and vice versa with the 10% winners, they made more on their winners, than they lost on their losers.

Read recently about a trader who truthfully advertised being up 1000%+ over ten years but was actually down $ for this reason.

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  #20 (permalink)
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whatnext View Post
So true. And also when you get out of a position at a good level and feel like a weight has been lifted and you can take a breather - that's when it can be the most important time to be involved for trying to capture some of the reversal.
...

If one trade affects a trader like that, then he is not ready to trade real money. He is either under capitalized, trading scared money, trading beyond the size that he should trading, or is just not psychologically ready to trade live. One winner or loser should have little psychological effect on a well adjusted trader. I read somewhere that a trader should judge their performance in blocks of 100 trades.

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