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Thanks @Rich Independence for the thread.
Getting back to the basic themes. As @rleplae mentions in a previous post: "trading is a zero sum game".
This is only partially true. I will modify a post I made recently to get to the point. As an economist I need
to clarify:
Futures are originally the counter position to real goods. That can be rice, oil, gold, currencies etc..
A Future is THE insurance for a price level that should be reached. Especially for the producer in the real
market (eg. rice) or a buyer of goods (eg. kerosene for a airline).
Every Future has a fixed ending time!
So the Future has always to do with the real world's markets. How does it work?
So taking a virtual example here:
We are planters of rice - 2 harvests per year.
We do have also contracts with buyers about a certain amount of rice and price over the year.
The quantity of harvest is previewed - but UNCERTAIN outcome can bring us negative gains.
We take a counter position on the rice futures market and hedge our harvest goal slightly.
As we can not influence weather, rain, others important for the rice plants - we can steadily
increase our hedge over time. This means we can effectively get to our goal(s) by getting
MORE or LESS contracts of rice Futures at a certain time.
At the beginning of the Future - the price is far away from the real market price for the real good.
This is of course about the uncertain outcome of the price at delivery time. The nearer
we get to the expiry of the future - the nearer the price of it gets to the now new market price.
The Futures market(s) are not a zero sum game - as the influences are coming
from OUTSIDE as well. Under normal conditions not much - but under difficult situations
quite a lot.
It is more a zero sum game if we are trading the new derivatives of Futures. Those are invented
from some banks to get money in the channels. In fact the derivatives do not have direct
"contact" - thus influence with the real goods markets and therefore do not influence the underlying
Future.
My statement was based to illustrate the difference with tradition equity.
If a company doubles in market capitalization, then effectively addition value is created,
the value of the total number of shares multiplied with the price has doubled, and this
does not necessary somebody equaly lost on the value of what the equity holders
gained.
With futures this is not true. For every contract where you make money another
counter part is loosing.
What @GFIs1 is saying that this could be offset with value being gained as a producer.
This is correct, but when only focusing on the futures contract, it is zero sum.
(despited that in combination of a hedge, the gain/loss could be offset with the
loss/gain made on the underlying)
Excellent Thread!!!!! thank you for having it!
You succinctly expressed "the one ring that rules us all"
In this business that we love and are in love so much.
Yes, the reality is very harsh!
The one thing that a very few of us are good at or have much is the emotional capital.
And we all start in this business not realizing what it is, and how badly it is needed to sustain our focus while we are in a pursuit of that summit.
This is most likely in par with people winning the lottery and spending it all shortly thereafter.
This business in time makes us realize just how little we know about ourselves.
And that is the #1 issue in my humble opinion.
We live in the world that wants us to conform. To belong. To follow the line. To be and stay in the middle. To be safe, risk free.
To live vicariously through the movies, comic books and indirect experience.
For example: Most of us come from families that were not very functional.
And that unfortunate life experience supports most if not all of our fears in life and in trading.
And since we don't have many chances to deal with those fears, we create more of them.
And trading/price speculating is exactly the opposite. Trading business needs us to have our shit together first.
Trading business requires us to embrace that direct experience. To risk. To live. To know ourselves.
And to live vicariously only through ourselves.
But again, to do that we must first learn who we are. What makes us tick ?
Therefore what you are talking about is absolutely normal for us.
And recognizing that right away is the first step in order to avoid what you are experiencing right now.
You mentioned the trading strategies that you have learned while pursuing your dream job.
But what have you learned about yourself in this period is far more important.
All of us that have a bug for trading are playing the biggest game in town. And this game is terrifying.
Since we have to be awake to play it.
Sometimes we need a little break to catch our breath and realize our focus again.
This may be that little break time for you
Trading is empirical in nature. It is scientific.
We must be that scientist and experiment and find that solution.
And as any scientist we always experience more setbacks and that is normal
Where would all of our world inventions be if the people that discovered them walked away before it happened ?
We must be in love with the process! Love the journey.
If you truly are in love with this business. Don't walk away. Don't throw in your towel.
Wash your towel. And wash it good. And let it air dry
So you will reassess yourself, your emotional capital, your goals, your direct experience!
And in those moments you will find the emotional edge needed to complete your mission.
And in that emotional edge you will realize your viable trading strategy.
And will use your beautiful towel again to enjoy at your beautiful beach house.
Unfortunately this is not true either OVERALL:
Every future is matched with a buyer and a seller to the same price. One could understand
that this is a ZERO SUM GAME. But it is not.
We have forgotten the transaction costs: For both - the buyer and the seller of the same
future in opposite direction are paying a sum to enter and then for exit again. Given this
arithmetic both - the buyer AND the seller are having a negative sum when accumulated.
Anyway - as said before about hedging - means influenced by ANOTHER market the gain for a
trader as long his accumulated trades made (both on the Future and the real good summarized)
are resulting in a gain.
Where we may speak the same language:
A trader can only be profitable when trading ONE instrument over time when:
a) he has an edge
b) there is not to much deviation on the losing side
c) has in total a win rate from at min. 55% in money over time
Depending on the market one is trading a win of 60+% is needed to only cover the costs.
1. More precisely I would then say, Futures is GROSS a zero sum game
(commissions, fees, and all other costs set asside, what one looses
the other wins, but in GROSS terms)
2. I agree with you, being profitable requires an edge + additional skills and things
thank you for having it!
