97% Of Traders Are Failures?

[It's Snake Pliskin]

Spread-betting companies deny losses on such a huge scale, but are loath to reveal actual figures. However, industry sources estimate the number of people who lose money when they bet is closer to 40% or 50%. And most betters take action to limit any losses.

With comments like this I'm not convinced 97% of traders, investors, spread betters lose. One British article - that's inconclusive - is hardly representative of the world trading community.

Did 97% of traders lose in the tech boom? Maybe so.

 

[brerwallabi]

Did 97% of traders lose in the tech boom? Maybe so.

But hey wasn't it good for a while, glad I didn't have all my eggs all in the one basket.

 

[It's Snake Pliskin]

But hey wasn't it good for a while, glad I didn't have all my eggs all in the one basket.

I had all my eggs in the bank. So, paradoxically, I won.

 

[tech/a]

brerwallabi

This question of what represents a successful trader isnt being addressed.
Everyone is arguing the 97% failure rate.

Thats like arguing how many smokers die a year and not discussing the definition of death!!!! or more to the point the DEGREE of death!

Personally I think anyone who can turn a profit consistantly over a period of years can call themselves a profitable trader.

Anyone who can return a wage consistantly (whether they trade fulltime or not) I think could call themselves an experienced profitable trader.

Anyone who returns excess money to their needs consistantly I would classify as successful!

However in the purists definition as in the Statistics presented from Tree I think the classification is net profitable after brokerage.

Julia.

http://www.infochoice.com.au/investment/onlinebroking/compare/tables/default.asp

I'm currently looking at Morrisons but considering CFD's for the short term trades I'm playing with.

 

[Kauri]

The 97% figure is for mine an Urban Myth... I wonder if anyone can post factual as opposed to anecdotal evidence to back up the 97% figure.......

From the Reality Times...an American Real Estate news and advice offering..

Are Homebuyers, Sellers Really Better Off With "Discount" Brokers?
by Blanche Evans


Discount brokerage may not be the answer to investment returns, according to recent study of a large discount stock brokerage firm's clients. The fault lies not in the brokerage services themselves, but in the personalities of the investors, according to the results. And the lessons for homebuyers and sellers couldn't be more apparent -- buy and hold still works in stock market investment and as a homebuying strategy.

Why is this pertinent? Many people, who would like to see real estate commissions come down further, point to the stock brokerage industry as a great example of why lower commissions will benefit consumers because they save money making the trades. But guess what? They don't make more money on the returns.

According to a recent study of discount brokerage customers, do-it-yourself stock and bond investors who take advantage of online low trading commissions didn't do as well as the investors who bought and held.

Behavioral finance professors Brad Barber and Terry Odean produced a startling report in January 2005 called "All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," that suggests that investors lost more money when they went online, primarily due to their own behavior. These investors tend to speculate rather than invest, trade more frequently and sell stocks that are better than the ones they buy.

Barber is at the Graduate School of Management, University of California, and Odean is at the Haas School of Business, University of California, Berkeley. In their abstract, Barber and Odean "test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns. Attention-based buying results from the difficulty that investors have searching the thousands of stocks they can potentially buy."

The pair researched the portfolios of 66,400 investors to find that active online traders (those taking advantage of the discount fees to do their own investing) were beating the market by 2 percent, but after they went online the discount route, they fell under the market by 3 percent. Active traders averaged 11.4 percent versus 18.5 percent for the buy/hold investors. The online discount brokers traded more, incurred more transaction costs, sold winners and bought losers.

According to Paul B. Farrell, columnist for CBSMarketwatch, "One thing I've learned from long experience, including a few years publishing a market-timing newsletter, is that very few of America's 95 million investors are psychologically strong enough to be successful traders; 99 percent will lose like they did in the 2000-2002 bear market."

He then outlined why:

· Investors tend to buy high, sell low, with a penchant for buying and selling at the wrong time. "Greed gets them in at the top of a bull cycle. Fear pushes them out at the bottom. They lose both ways."

· "Markets are random, irrational, unpredictable. Wharton School economist Jeremy Siegel studied 120 of the biggest up and down days between 1801 and 2001. Only 30 could be explained. The market is random 75 percent of the time. You cannot predict the unpredictable."

· An optimism bias causes investors to have too much confidence. "We overestimate our skills and our grasp of the market. We underestimate risks. Then we forget about our losses, even tell researchers we're beating the market when our returns are less than inflation. That's denial."

· The more you trade the less you earn because active trading increases transaction costs and more trading resulted in losing trades.

· Trading online makes losing easier causing traders to fall 3 percent under the market. "Trading is not the get-rich-quick scheme that financial newsletters and trading-system gurus want you to believe. One study by the North American Securities Administration Association found that 77 percent of day-traders lose money. The "winners" total take averaged $22,000."

Farrell's conclusion? "By trading frequently, individuals hurt not only their performance net of fees, but they also hurt their performance before fees."

There's a lesson here for the homebuyers who use discount brokerage to net bigger gains in housing. Buy and hold strategists are being replaced by speculators. Low interest rates, low and no-down-payment loans are helping to fuel more speculative buying. Buyers aren't staying in their homes as long as their parents, using dropping interest rates to "move-up" or buy second-homes. Over one-third of homebuyers are buying homes they don't intend to occupy, according to a 2004 study by the National Association of Realtors. Nearly 23 percent of homebuyers last year were investors and another 13 percent were second-home buyers.

So what do do-it-yourself stock investors have to do with homebuyers?

While the relationship has yet to be proven, they could have the same mentality. If they are smart enough to demand and get lower commissions, then they must be smart enough to make their own investments.

Published: June 9, 2005

 

[tech/a]

Great article---In general.

 

[Kauri]

At least it seems the figures have improved since these in 1999... however it should be remembered that online trading was the new fad in the late 90's attracting a lot of inexperienced people, and also the massive problems that American traders faced with the online brokerages with trading platforms being inaccessable for at times days , the delays in order processing, buy/sell buttons being deactivated etc.. I seem to remember some courtcases over it at the time..
Off tack a bit but I think every trader should run their finger over the 8 points listed below.... ....

Alpesh Patel – A weekly look at market opportunities and pitfalls

Alpesh B. Patel is one of the UK's best-known traders and financial journalists. He writes a regular column for the Financial Times, has written seven bestselling books on trading, and makes regular television appearances for Bloomberg, Sky Television, Channel 4, The Money Channel, and the BBC.

​

Women and Men; Mars and Venus

14/09/05

As I prepare for three book launches - one in Glasgow, one in Edinburgh and one in London for my new book on Women in Business (I know I am not a woman, but my co-authors are and I wrote the 'male bits' over the past 3 years!) I think about how men and women trade differently. One such difference is men are more likely to be addicted to trading.

Could it be that some people are simply addicted to trading? Several websites are dedicated to recovering "traderaholics". Even professional traders suffer from it.

Nearly 15 million Americans have gambling addiction according to a 1997 study by Harvard Medical School. An equivalent UK proportion would be 4m people.

In 1999, the North American Securities Administration Association (NASAA) released a study into the most active of trading, day-trading, noting only 11.5% make money. If winners are few, the addicts are not amongst them. Stock market gamblers contacting the not-for-profit New Jersey Council on Compulsive Gambling had losses of $50,000 and $250,000 compared to $38,000 average debt of casino addicts.

During the six weeks following the October 1987 crash 44% of the calls to US based '1-800 GAMBLER' helpline were from traders.

The problem can be more serious than merely debt. This year will be the 6th anniversary of when online trader Mark Barton, suffering massive market losses, walked into two US brokerages offering online trading, and killed 9 people, then himself.

So what does addictive online trading involve? The authoritative Diagnostic and Statistical Manual of Mental Disorders, provides criteria for diagnosing pathological gambling. The more of the following criteria that are met, the more serious the problem.

1. Excitement. Online trading addicts do it for the excitement not the money. They need to trade with increasing amounts of money to achieve the desired excitement. However, professional traders, for instance those interviewed in my The Mind of a Trader emphasise good trading should neither involve excitement at gains or pessimism at losses.
2. Preoccupation. Addicted traders often find trading "took up all their time." However, professional traders talk about their ability to 'switch off' outside work.
3. Loss of control, exhibited by repeated unsuccessful attempts to control their trading. Certainly addicted online traders will be unable to stop until all money was lost and huge debts incurred.
4. Chasing losses. As an addicted online trader loses more and more money, the urge to get it back becomes increasingly powerful. The very nature of that desire requires active daily trading. The addict will be rapt by the memory of a "big win," when their gambling paid off. They use this memory to justify continuing to pursue their losses.
5. Irritability when trying to cut down their trading. Traders deprived of their computer screen or attempting to "cold turkey" can experience withdrawal typical of other addictions.
6. Escapism. Trading online to escape other problems.
7. Lies to conceal the extent of involvement with trading. Dishonesty is a trademark of addiction.
8. Jeopardising a significant relationship or job because of trading. A particular lesson here for those trade at work.

 

[ice]

It's probably impossible to interpret figures on the percentage of traders who fail, without knowing the terms of reference of the 'study' or the checks and balances used.
I read of a survey done at the height of the tech boom (USA) which found that only 10% of traders made money and only 10% of them made money consistently enough to make a living at it.

However at the height of the tech boom every man and his dog was treating the bourse like a TAB so of course many were going to lose, through either inexperience or ineptitude . Add to that those who were hopelessly undercapitalised (which is the biggest impediment of all), and it's not surprising the statistics were so grim.

If the same survey had been undertaken 12 months after the tech wreck the results may have been much more positive as only the competent would still be trading.

Bottom line; there are lies, damn lies, and statistics.


ice

 

[Mofra]

I have been given a figure of 80% of speculators losing money consistently on the market.

This was from the most recent FSRA training I have undertaken, and that figure had been quoted before.

Seems to be a little basis for the 80% figure as the 97% figure, as the 80% seems to have been taken from futures markets at the time of the regulations being enforced.

 

[ozewolf]

The comment in the Adaptive Analysis thread that 97% of traders failed really astounded me. Is this comment fact, can anyone show statistical evidence from a reliable source that this the case. Or is the comment used similar to the comments used by real estate agents, used car salesmen and other snake oilers. Am I one of the 97% or one of the 3%? I wonder how I determine success or failure. Is there cut off point in return from trading capital that determines success or failure. Is a 10% return failure or is 15%? Certainly losing your capital is failure. I would always like to improve my trading but how do I determine if I am successful? I have my trading plan and over the last three years have achieved my goals and have improved my performance (return) each year. So is someone failing if they do not achieve someone elses standard or use their method.

Hi there,

Trading success does start with not being to greedy...that is taking a profit at somewhere near the 25% mark.
Always has worked for me...

Cheers
Ozewolf

 

[Julia]

brerwallabi

This question of what represents a successful trader isnt being addressed.
Everyone is arguing the 97% failure rate.

Thats like arguing how many smokers die a year and not discussing the definition of death!!!! or more to the point the DEGREE of death!

Personally I think anyone who can turn a profit consistantly over a period of years can call themselves a profitable trader.

Anyone who can return a wage consistantly (whether they trade fulltime or not) I think could call themselves an experienced profitable trader.

Anyone who returns excess money to their needs consistantly I would classify as successful!

However in the purists definition as in the Statistics presented from Tree I think the classification is net profitable after brokerage.

Julia.

http://www.infochoice.com.au/investment/onlinebroking/compare/tables/default.asp

I'm currently looking at Morrisons but considering CFD's for the short term trades I'm playing with.

Hi Tech,

Essentially agree with the first part of your post. As long as I can live off my dividends plus see capital growth each year, I'm happy.

Yes, I had a look at Infochoice before deciding to go with E-trade. So far I'm perfectly happy. They have a great website and the customer service so far is good.

Cheers
Julia

 

[It's Snake Pliskin]

Anyone in my view can trade a winner---but,
2-5% will consistantly profit from trading--consistantly being over a period of 12 mths or more and over Breakeven including brokerage.

Tree has quoted statistical evidence.

My view.

Tech,

Where do you get this 2-5% from?

There are too many variables that affect the accurate recording and producing of statistical evidence to back up these claims. I think we will never know.
Snake

 

[brerwallabi]

brerwallabi

This question of what represents a successful trader isnt being addressed.
Everyone is arguing the 97% failure rate.

However in the purists definition as in the Statistics presented from Tree I think the classification is net profitable after brokerage.

Yes they are all missing one of my many questions in my threadstarter, basically what represents a successful trader. I did pose a few questions oringinally, sorry about the poor punctuation may be the questions were not quite clear. I feel only Tech has got anywhere near answering one question for me.
Net profitable after brokerage hmmm, could not call myelf successful if I was just a tad in front, someone else said 25%. Is 25% per trade good, or 25% overall good, should this year be treated differently from last year- damn even more questions now.Still don't believe the 97% still smells of snakeoil to me.

 

[money tree]

I think some of you are clutching at straws here.

You secretly hope the statistics show that trading is easy so that you are more likely to succeed.

This is classic novice mindset.

What difference does it make if the figure is 97% or 90% or even 80%? If it was 50% would that make YOU more or less likely to cut losses early?

The house edge at the casino is 3%. IE 97% of people dont lose. The same can be said for the market. Brokerage / spread is around 3%. The problem is that if you keep betting at the casino your odds diminish. After 10 hands your odds of winning are .97 x .97 x .97 x .97 x .97 x .97 x .97 x .97 x .97 x .97 = 0.737. This means if you walk in with $1000 and spread it over the roulette table, after 10 spins its likely you will have $737 left.

The same applies to trading. If you keep deducting brokerage it becomes harder and harder to make money. Add to that the issue with control. Traders hate to take losses and let them build, while they take profits too quick. In the casino you usually have no control over the outcome.

Basically your odds of success in this game are improved by FEWER number of trades and the historical tendancy of long term markets rising. IE, INVESTORS have a high chance of success, while daytraders have a very LOW chance of success. This is why I have always discouraged my students from "trading" as opposed to "investing".

 

[tech/a]

brerwallabi

This question of what represents a successful trader isnt being addressed.
Everyone is arguing the 97% failure rate.

Thats like arguing how many smokers die a year and not discussing the definition of death!!!! or more to the point the DEGREE of death!

(1) Personally I think anyone who can turn a profit consistantly over a period of years can call themselves a profitable trader.

(2) Anyone who can return a wage consistantly (whether they trade fulltime or not) I think could call themselves an experienced profitable trader.

(3) Anyone who returns excess money to their needs consistantly I would classify as successful!

However in the purists definition as in the Statistics presented from Tree I think the classification is net profitable after brokerage.

.

Well there is my classification of successful.
There are many business owners I would place in (1) or (2) so wouldnt say they are a success in business.Few are at (3) and have funds from business available for other ventures--excess where their "Money makes money"! These I see as successful.

Now what % of traders are in my classification of Successful. I think nearer the 3%.
If a trader makes profit and dost need it and can use it to compound and re invest then their trading would be successful---even though their ability to do this could be bought about by a business that takes care of the day to day costs.If then they are gaining a consistent growth on $$s invested then that would be also Successful in my veiw.

 

[It's Snake Pliskin]

I think some of you are clutching at straws here.

You secretly hope the statistics show that trading is easy so that you are more likely to succeed.

This is classic novice mindset.

What difference does it make if the figure is 97% or 90% or even 80%? If it was 50% would that make YOU more or less likely to cut losses early?

The house edge at the casino is 3%. IE 97% of people dont lose. The same can be said for the market. Brokerage / spread is around 3%. The problem is that if you keep betting at the casino your odds diminish. After 10 hands your odds of winning are .97 x .97 x .97 x .97 x .97 x .97 x .97 x .97 x .97 x .97 = 0.737. This means if you walk in with $1000 and spread it over the roulette table, after 10 spins its likely you will have $737 left.

The same applies to trading. If you keep deducting brokerage it becomes harder and harder to make money. Add to that the issue with control. Traders hate to take losses and let them build, while they take profits too quick. In the casino you usually have no control over the outcome.

Basically your odds of success in this game are improved by FEWER number of trades and the historical tendancy of long term markets rising. IE, INVESTORS have a high chance of success, while daytraders have a very LOW chance of success. This is why I have always discouraged my students from "trading" as opposed to "investing".

I disagree,

Casinos and trading are fundamentally different.

Moneytree post some results to show you are not a novice.

 

[GreatPig]

Casinos and trading are fundamentally different

The primary difference is the level of skill involved.

With one or two exceptions, casino games have no element of skill what-so-ever. The only rule that applies is that the more you play, the more likely you are to get the average return, which is always less than 100%. A regular player has no advantage over a complete novice.

Trading, on the other hand, involves an element of skill. If it didn't, professional traders like Daryl Guppy would have no advantage over anyone else, and would ultimately tend towards the average return, which is 100% minus the brokerage rate.

For comparative purposes, 100% return means just getting your money back, not doubling your money (that's how returns are usually stated with gambling games).

Cheers,
GP

 

[wayneL]

Casinos and trading are fundamentally different.

I agree they are different.

However, the way trading is viewed by the vast majority is no different; particularly in leveraged markets like forex.

When you mention expectancy, MM etc, it usually draws a blank. Oh they are gamblers alright.

The difference is that in financial markets you can swing the expectancy in your favour. You can't in the casino.... or, if you do by card counting etc., they throw you out. Heck, in the US card counting is actually illegal!!!!

 

[Kauri]

I personally think that the first step towards being a successful trader/investor is honesty with yourself.Cruise through the popular share forums and see how many posters actually own up to a loss on a trade. Until a person realises that not every trade will be/can be a winner then they are only fooling themselves.
Possibly as I'm not the brightest globe on the christmas tree :homer: it took me the first two years of my trading/investing journey to find the method that suited my personality and actually break even. Could I be classified as a successful trader now... if that means that I live from the profits and have enough left over to invest elsewhere then no I'm not...if it means that I now consistently turn a profit annually and continue to learn and improve then yes, I am.

 

[Julia]

The primary difference is the level of skill involved.

With one or two exceptions, casino games have no element of skill what-so-ever. The only rule that applies is that the more you play, the more likely you are to get the average return, which is always less than 100%. A regular player has no advantage over a complete novice.

Trading, on the other hand, involves an element of skill. If it didn't, professional traders like Daryl Guppy would have no advantage over anyone else, and would ultimately tend towards the average return, which is 100% minus the brokerage rate.

For comparative purposes, 100% return means just getting your money back, not doubling your money (that's how returns are usually stated with gambling games).

Cheers,
GP

Hi GP,
In your comment above "100% return means just getting your money back, not doubling your money", presumably you mean this just as far as gambling is concerned, not with reference to share trading?

e.g. if I paid $1000 for some shares, paid $50 brokerage to buy and the same to sell, and at the time of selling they were worth $1200, then I have made 10% after deducting brokerage?

Cheers
Julia