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Trading Is Hazardous to Your Wealth [pdf] (2000)

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Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#31

Post by jaredtn »

lend000 wrote: post #26

If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets. This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth par…

Two counterarguments:

1) Trading fees. If the house takes a cut of 0.1% on every transaction, then on average those who trade more lose more money.

2) Risk/reward tradeoff. If you buy deep out-of-the-money options, you might have a 5% chance of profitability, but expected return of $0 (neither positive nor negative). 95% of the time you lose $X, and 5% of the time you make $19X. If traders are pursuing riskier strategies, you'd expect most of them to lose money.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#32

Post by H8crilA »

lend000 wrote: post #26

If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets. This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth par…

This is not why the 90/50 contrast exists.

It exist due to "absorption barriers", due to the ergodicity of the process - betting too big and hitting "uncle points".

It's a bias present in most people, especially otherwise intelligent people: not understanding that there is a huge difference between expected value and ergodic properties. Between expected returns and risk. Just look up what VaR is, the concept is ridiculous, yet so widely used.

How much should the win (5/6) value be in a game of Russian roulette for you to play the game? The answer is that for most people it is not any number, that value doesn't exist.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#33

Post by exabrial »

I don't trade individual stocks, I don't know enough. But I do buy ETFs, which are ran by people that [theoretically] do know enough. As an experiment I bought in after the March crash on a few ETFs that got hit hard. I'm pacing with the index which is good enough I guess.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#34

Post by jmwilson »

andylei wrote: post #17
clairity wrote: post #16

Earlier quoted context omitted.

not any strategy, but any strategy that's reasonably close to the efficient frontier of possible portfolios.

actually, on average, all strategies will perform the same as the market. another way of saying this is: the average of all trading strategies is the market.

That's not a helpful way of looking at things since individuals do not trade the average strategy. They trade whatever theory they are seeking to validate, which is too often "their gut" or the latest technical analysis woo. These people are cannon fodder for algorithmic traders and market makers. The average of all retail trader strategies is definitely not the market.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#35

Post by jaredtn »

alexandercrohde wrote: post #14

It's my understanding that, if commissions are free (e.g. Robinhood) then on average, any trading strategy is going to perform comparable to the market average. If you can find any reliably bad strategy (in a fee-less market), then you have necessarily found an outperforming strategy that is the opposite.

Eh, if I wanted bankrupt a trading account by playing a reliably bad strategy, I'd buy deep out-of-the-money options expiring this Friday. The expected value is $0 (neither positive nor negative), but they have only a miniscule probability of profitability.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#36

Post by tripletao »

ashtonkem wrote: post #18
WalterBright wrote: post #10

I read an article a few years ago that compared the trading performance of various strategies. The number one performer was the "dead people" strategy, which happens when a person dies and his portfolio cannot be traded while the inheritance issues are sorted out. Next best is the broad index fund, and dead last was the average investor. Edit: Found the article! https://www.businessinsider.com/forgetful-investors-per…

What’s the difference between the dead person strategy and an index fund? The dead strategy involves whatever stocks they had selected at the time?

The dead person can't make bad decisions on when to buy/sell the index fund. Those "bad" decisions don't even require an attempt to time the market, if e.g. you always invest whatever's left over after ~fixed living expenses, and you get paid more when the market's higher.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#37

Post by socketnaut »

alexandercrohde wrote: post #14

It's my understanding that, if commissions are free (e.g. Robinhood) then on average, any trading strategy is going to perform comparable to the market average. If you can find any reliably bad strategy (in a fee-less market), then you have necessarily found an outperforming strategy that is the opposite.

You can reliably lose money in absence of commissions by buying at the ask and selling at the bid. You can't invert that to make money.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#38

Post by clairity »

nostromo wrote: post #15
lihaciudaniel wrote: post #2

why do people think trading will make you rich?

Because there are some very rich traders, including the fourth-richest person in the world.

he's an investor, not a trader, and has outsized influence on the outcomes of his investments.

Re: Trading Is Hazardous to Your Wealth [pdf] (2000)

#39

Post by lend000 »

jaredtn wrote: post #31
lend000 wrote: post #26

If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets. This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth par…

Two counterarguments: 1) Trading fees. If the house takes a cut of 0.1% on every transaction, then on average those who trade more lose more money. 2) Risk/reward tradeoff. If you buy deep out-of-the-money options, you might have a 5% chance of profitability, but expected return of $0 (neither positive nor negative). 95% of the time you lose $X, and 5% of the time you make $19X. If traders are pursuing riskier strate…

Trading fees are a valid counterargument here, and while they are non-negligible (especially back when the "90% of day traders lose money" rule was established), I don't think they account for the full 40%.

For point 2, if there is an expected return of 0, then on average this should push the portfolio toward 50% chance of profitability.

It is the psychological factors combined with a non-random market that ensure most traders lock in losses (usually after riding them too long or not long enough).

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