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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)

#61

Post by sm0ss117 »

hash872 wrote: post #46

Not in any way defending day trading, but I think it's interesting that it's become such accepted wisdom about how bad it is- here on a website dedicated to startups. 90% of day traders lose money, what are the odds for startup founders? Probably more than 90% fail, yeah? Imagine if, within the next 20 years, it becomes normal & accepted wisdom that joining a startup and taking their basically worthless 'equity' is m…

You don't work at a startup to make more money, you work at a startup for non-monetary benefits and if you're extremely lucky you might get rich quick. Average case is you make less, good case is you make even if your company is highly successful.

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

#62

Post by rsp1984 »

chrischattin wrote: post #55
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 absolutely right. I'm handily beating the market with an automated strategy I designed to the point I've all but shut down my startup/programming consulting business. What the system trades, and what I understand intellectually is the right thing to do, is often very hard to stomach emotionally.

May I ask how you got started? What is the tech stack you are using today? Any resources you can recommend?

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

#63

Post by hash872 »

sm0ss117 wrote: post #61
hash872 wrote: post #46

Not in any way defending day trading, but I think it's interesting that it's become such accepted wisdom about how bad it is- here on a website dedicated to startups. 90% of day traders lose money, what are the odds for startup founders? Probably more than 90% fail, yeah? Imagine if, within the next 20 years, it becomes normal & accepted wisdom that joining a startup and taking their basically worthless 'equity' is m…

You don't work at a startup to make more money, you work at a startup for non-monetary benefits and if you're extremely lucky you might get rich quick. Average case is you make less, good case is you make even if your company is highly successful.

Without pointing any specific fingers, people were pushing 'you should spend your 20s working 60-80 hours a week at a startup so you can get rich' really hard for a while there. It's only relatively recently that this is understood to be a bit of a con

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

#64

Post by alasdair_ »

H8crilA wrote: post #32
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 ridic…

>not understanding that there is a huge difference between expected value and ergodic properties

Can you expand on this? Are you claiming that the stock market is ergodic, or that it is not?

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

#65

Post by leetcrew »

esotericn wrote: post #53

Can someone explain to me why people keep referring to average return as some sort of magical answer to the question? The median person makes the median income, that doesn't mean that trying to get a good job is pointless. By definition in order for you to make more than the market, someone else has to make less than the market. Assuming that knowledge has superlinear returns (I consider this to be obvious without pr…

a lot is stacked against you as a private investor. being very smart is not enough to beat the market consistently when your competition is other very smart people who themselves have a support staff of very smart people and they all spend 8+ hours a day analyzing the market and making trades.

even if you quit your day job to trade full-time, they can collect information in ways that you can't (eg, satellite imagery), and they may also have direct lines to an exchange to execute trades faster than you. unlike you, they trade in large enough volume that they can get people to pick up the phone to trade after the exchange closes. they have access to entire classes of investments that are closed to you due to capital requirements.

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

#66

Post by jaredtn »

socketnaut wrote: post #43
jaredtn wrote: post #35

Earlier quoted context omitted.

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.

When you say "expected value" are you trying to say most likely value?

No, I mean the mathematical mean, not mode. If you take this action infinitely many times, what is your average (mean) return? https://en.wikipedia.org/wiki/Expected_value

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

#67

Post by jaredtn »

lend000 wrote: post #39
jaredtn wrote: post #31

Earlier quoted context omitted.

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 mo…

If I roll a 100-sided dice that pays me $99 if I roll a 1 and -$1 if I roll 2-100, then my expected value is $0, but my chance of profitability is 1%.

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

#68

Post by hogFeast »

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…

Yep, that is a fairly common misunderstanding that the general public makes (and ends up with: if I just take the opposite decision then I will make money).

The main reason why 90% lose money is costs. That is it. Most people probably are optimised for losing money but the main issue is really costs/overtrading.

But related to this, most people believe that edge on profitable trades is very large...but in most markets, institutional-grade costs will still be a big chunk of your edge i.e. costs matter hugely.

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

#69

Post by bugzz »

jaredtn wrote: post #67
lend000 wrote: post #39

Earlier quoted context omitted.

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 mo…

If I roll a 100-sided dice that pays me $99 if I roll a 1 and -$1 if I roll 2-100, then my expected value is $0, but my chance of profitability is 1%.

He's saying that traders don't just make 1 bet in their lifetimes though.

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

#70

Post by tlb »

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…

And it's not even that day traders' decisions are wrong. It's just that they're predictable in advance by HFTs who can act on news stories within milliseconds, so they're always buying after the uptick and selling after the downtick.
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