Recently I met up with two great blokes (on separate occasions) who were able to share some great insights with me (no Nick Leeson wasn’t one of them!). Actually, I am not sure whether they were aware that they were imparting some great experience-based wisdom into me. They probably felt that they were painting a rather dire picture for me (and speculative retail traders in general).
However I also feel the need to reconcile their views with some of the facts that i see before me – that there are some individual traders making consistent profits right before my eyes (not many, but some).
Trader#1: Spent two decades working as a senior trader with several large financial institutions, and now trades the market from a longer-term perspective (positions lasting several months or more) with his own capital. He also sits on the board of a multi-billion dollar hedge fund.
Trader#2: Has been a trader for 15 years and currently owns/runs a London-based hedge fund.
The key points I took from these conversations (and most likely things I nor other retail traders like to hear):
- Managing transaction costs is very important.
- It is very difficult to make consistent profits as a retail/prop trader, particularly over longer periods of time – most successful traders find a niche, do well in it, and fail to be able to find a new niche when the original dies due to constantly changing nature of the markets and specific instruments.
- Longer-term winning strategies tend to have a low win rate and a high reward-risk ratio, and for this reason are difficult to execute by human traders because of their emotions and psychology – thus it’s better to use robots instead
- A common scenario is for traders to do well for a little while, making consistent profits, only to blow up half their account in a single session due to a huge unforeseen event (such as the Swiss National Bank action in January)
- Backtesting and analysis are very important – (if hedge funds spend months and enormous computer power backtesting their strategies, then shouldn’t I invest more time in it too?)
- Trading in 2015 is hugely different than trading in say the mid 1980’s (e.g. The Turtles) – the market never stays the same and has become much more difficult and competitive
- Success in various trading areas (daytrading, systematic, discretionary etc) can be largely impacted by trader personality and trader’s level of intelligence
- Focus on a small number of instruments (as few as 2 or 3)
And finally, here’s some thoughts that were triggered from a chat with a very profitable retail trader:
- It’s not that difficult to learn the technical aspects of trading – it’s not brain surgery.
- Can I see the money being printed on the charts – whenever I see big red or big green candles?
- Thus the most likely reason for people losing money is to do with mental issues and/or mental state
- This makes me think -> It really might just be a case of me stopping taking invalid setups and making sure I get as many of the valid ones as possible.