I recently ran across The Loser's Game again, here reprinted in The Financial Analyst Journal. Here is the quote the resonated the most to me with trading:
Expert tennis is what I call a Winner's Game because the ultimate outcome is determined by the actions of the winner. Victory is due to winning more points than the opponent wins – not, as we shall see in a moment, simply to getting a higher score than the opponent, but getting that higher score by winning points.
Amateur tennis, Ramo found, is almost entirely different. Brilliant shots, long and exciting rallies and seemingly miraculous recoveries are few and far between. On the other hand, the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.
As a scientist and statistician, Dr. Ramo gathered data to test his hypothesis. And he did it in a very clever way. Instead of keeping conventional game scores – "Love," "Fifteen All." "Thirty- Fifteen." etc. – Ramo simply counted points won versus points lost. And here is what he found. In expert tennis, about 80 per cent of the points are won; in amateur tennis, about 80 per cent of the points are lost. In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser. The two games are, in their fundamental characteristic, not at all the same. They are opposites.
When I look at my recent run of trades, 79.4% of my trades add up to net $0. The net profit is what remains of the other 20.6% that I have managed not to give back to Mr. Market, yet. There are some days (like this one) where winning should be easy. But most of the time it feels like forced error after forced error. Keeping those to a minimum is key. So far keeping losses to 0.5% per trade and stopping for the day after two losers has been essential to survival. I hope to eventually improve (decrease) the number of losing trades.
What do you think? Is trading a Loser's game where your focus should be on avoiding losing situations, or do you think that hitting the bid at the right moment to take out the previous low can change the market's perception and thus win the short you just entered? What statistics from your trading support your view?
The following 2 users say Thank You to bijeremiad for this post:
The real difference with the tennis analogy is that in trading the professionals play against the amateurs just as much as they play against other professionals. I don't think you can take the analogy down to the trade level to say swinging for the fences or playing defensive on an individual trade make someone amateur or pro. It is how the game is played in the aggregate. That researcher could not come to his conclusion by watching only one point in a match, he watched many games.
Professionals know what kind of edge they have. They use their setups consistently, know their risks, use proper risk management, and know when not to play the game.
Amateurs are searching for an edge, yet are still willing to proceed playing the game. They may have a wide variety of changing setups, are unsure of the risks, don't always use proper risk management, and have not gained an understanding of their trading well enough to know when not to play.
Everyone has an innate skill level for tennis and for trading. Discipline is where the difference comes in, those disciplined individuals rise to their potential. For some that may be professional tennis/trading, for others they may never exceed an amateurs skill level. Those not disciplined are much more likely to populate the amateur ranks as they will be less likely to have the full understanding of what they are doing.
On the statistics side there is some analysis in the elite section that deal with what is better, higher % profitable or higher average win/loss ratio. It is not a holy grail, but increases understanding of the game being played. Overall, I think that both are noble goals and the decision should be based on the trader, not the statistics.
Last edited by Luger; July 13th, 2012 at 01:03 AM.
The following user says Thank You to Luger for this post:
Have you considered that perhaps the 0.5% and two losers in a row is part of the problem itself? Maybe the 0.5% is okay, but two losers in a row? Any reason for that? If you are not quite sure what you're doing yet, that's a good way to preserve capital, but so is sim trading--I know many people have a problem with this, but have you considered sim trading for a period to establish good returns to give yourself more confidence in what you're doing?
What do you mean by "hitting the bid... can change the market's perception"?
The following user says Thank You to josh for this post:
The two losers are not consecutive, but for the day. Five trades max, quit after two full stop losses. The rational is similar to what cadaver suggests on his site, Nine Transitions. My journal on futures.io (formerly BMT) is currently sim, sorry if that was not clear.
When watching price, I will look to see if the stock registers lower lows to assess if the bearish tendency will continue. As price approaches the prior low, the last trade will sometimes be a few pennies higher, but the market bid will be below the prior low. Sometimes, someone takes that bid, sometimes price trades back up on offers getting lifted. I have wondered if traders have had any experience with taking the bid price, registering the lower low, which would then suggest the bearish bias is still present.