Two Traders Talk – Part III – the rarity of profitable traders

Several months ago, back in April’18, a long conversation over coffee between my trader buddy and I sparked a number of ideas in my head.  We explored various aspects of our respective trading journeys, both of which were now several years in duration.

This is the third part of exploring the themes that sprung up in that conversation.  The themes in this post are the rarities of profitable traders and the difficulties in even identifying those likely to be successful.

For the earlier parts, here are the links:

Ironically, that conversation also marked a point of what seemed to be a breakthrough in my trading – since April’18 there have been several months of consistent, disciplined, researched, documented trading from yours truly with small steady profits from around 150 individual trades.

On that fateful day in April, over coffee, one of the themes we discussed was what it takes to be a successful trader.

The Institutional Perspective

SM, a friend of mine is a senior manager with a large investment fund  (see earlier blog post: Burgers with multi-billion-dollar fund insider), and spent 15 years on the trading desks of several large banks.  Some time ago he shared some insights into trader recruitment process they had at one of the banks.

Canary WharfCandidates would be put through a filtering process via various IQ and personality tests as well as their ability to identify and recognise patterns.  This reduced the number of individuals considerably.  The interviews were a tedious process and in the end a bare 15-20 bright people would end up on the training program.  After a year of intensive trading, much of it with experienced and profitable traders sitting right alongside them, only a couple would actually end up turning into profitable traders for their bank.  (To learn more about some of these training programs, I suggest books such as Liar’s Poker, FIASCO and Why I left Goldman Sachs – though some of these were written more than a decade ago).

Think about it – if twenty hand-picked, rigorously-tested, energetic, young individuals, trained full-time by experienced traders, having access to minimal transactions and leading edge technology, have a 10% success rate, where does that leave aspiring retail traders who are trying to cut it on their own?

This reconciles completely with views expressed by a very smart friend of mine who runs a hedge fund and has been in the trading industry for 20 years.  He says profitable traders, regardless of their trading approach, are very rare.

SM says that during his tenure at the bank, a lot of time was invested in trying to identify those individuals that were likely to become successful traders – to arrive at a list of common factors that could be used a screening mechanism – with many traders’ and HR’s time invested to the project, they were not able to come up with distinct or solid answers.

Why are we better at some things than at others?  When I started inline skating in 2002, I found it very easy to learn and progress – within no time I learned to speed, turn, stop, attended organised street skates and got faster and faster!  Whenever I am writing on my blog, the words come to me fairly quickly.  It doesn’t seem like work.  With trading, I have put blood, sweat and tears into it for many years on a full-time basis – yet I have not become profitable trader.  Yet others spend less time and become profitable and competent traders.  Why is that?  Is it a case that some people are just more suited to be good traders, and others are not.

Never Give Up

Will my trader buddy and I continue striving to become profitable traders?  Bet your ass we will!  Why are we so driven?  Why do we not give up?  Maybe it’s because this is what we really want!  Something deep inside ourselves wants this and we want to make it.  We look the shocking success numbers in the eye and, however irrational, we just keep going!  We will climb that mountain (that was in Georgia two years ago)!  Are we nuts?  Clearly we must have a lot of self-belief and confidence, else we wouldn’t keep going!


Survivorship Bias

There have been books that studied successful traders – it makes complete sense to simply study those have succeeded – and attempt to template their journey and characteristics.  Jack Schwager’s ‘Market Wizards’ books are a great read in this area.  Despite the traders having some things in common, in other areas, particularly regarding trading strategy, they differ greatly.  Of course, it’s fair to argue that there must be many different ways of making money in the markets, many ways to ‘skin the cat’.  That said, my skeptical side continues to nudge me and whispers ‘survivorship bias’.

Another situation where we considered survivorship bias might have a hand in play, is in the realm of system trading.  I wouldn’t be surprised if most systematic traders would punch me if they could for writing such outrageous sentences!! On a more serious note, I am sure they could pinpoint some flaws in my thinking, and explain clearly and easily that systematic trading does not suffer from survivorship bias.  However, to me, testing a large number of potential strategies, even with the detailed steps of out-of-sample testing and walk-forward testing, and then ending up with a small numbers that finally pass all these steps just does not sound right to me.  (by the way, ‘Building Winning Algorithmic Trading Systems’ by Kevin Davey a good read in this area – and Dave Bergstrom is also a great resource) .

Supporting this view -> A systematic trader working at a hedge fund for the past 10 years, with whom I have a lot of interaction, tells me to exercise care in looking at all those attractive-looking equity curves plastered across Twitter every day.  He believes many of these fall prey to various errors, and the results implied by those graphs would just be astonishing in the realm of hedge funds.  Again, are those twitter accounts with the nice looking graphs simply the ones that have randomly stood out and survived?

The other natural question to ask is that if the edges could be found by individual traders working hard on their own with their relatively limited resources, then surely well funded and technology-armed professional traders and institutions would have already picked all those up and traded the edges away.  A counter-argument here is that some trading strategies may not allow position sizes large enough to accomodate larger trading accounts, though provide ample capacity for a lone retail systematic trader.

Who are the profitable retail traders?

My trader buddy and I actually struggled to identify retail traders we personally knew to be profitable on a consistent basis.  We could think of many people who spent years on their trading journey, but who had not seemed to have progressed over time (we counted ourselves among those).  We also thought of some people that we believed to be profitable – and quickly realized that they had been profitable since we first met them.  We could not think of anyone whom we personally witnessed make the transition from an aspiring trader to a consistently profitable one.

Next we considered the question of whether it is actually possible for profitable traders to explain what makes them profitable?  If they point to a raft of habits and skills, how can we know that those items are actually the differentiating critical success factors?  Are there other individuals with the same habits and skills, who are not profitable?

A salesperson could probably not explain in full detail the tricks of their trade, even if they wanted to.  They can probably explain a great chunk via a few simple rules and that will go a long way.  The same might be true for traders.

To recap then we are discussing the possibility that it might be incredibly difficult to become a profitable trader and even predicting who is going to succeed based on personal attributes and core competencies, might be rather difficult.

And to reiterate the following point:  Large banks with significant resources seem unable to identify the attributes of candidates likely to lead to trading success, and are only able to turn a small percentage of their carefully selected candidates into profitable traders using training processes that are far superior to any of those that retail traders are exposed to.

The next question we considered is whether it is possible for successful traders to teach others how to trade.  In order to attempt to answer this question, I will go over my experiences in working together with three profitable retail traders.  That will be the core of Part IV in this ‘series’ – which will hopefully come along more quickly than Part III did!

Keep those eyes peeled & good luck for your own trading!





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7 Responses to Two Traders Talk – Part III – the rarity of profitable traders

  1. David says:

    I don’t think you need a high IQ to trade – (Let’s face it anyone can read a forex chart! ) but you have to be thick skinned -the market will judge you in a way no person would. Nobody goes to work and has money taken off them by their boss. I have been self employed nearly all my life and I think that is a personality type. Self reliant, self effacing and prepared to deal with the knocks. Joe Blow who works for the bean counters will never trade. A lot of American footballers however, made the grade.

    Liked by 1 person

    • Hi David! Thanks for your comment. Interestingly, I have always been self-employed too, save for the first three years following graduation. I had not been aware re the NFL players point you made – interesting!


  2. I have been a systematic retail day trader since 2005. I have been profitable 10 out of the last 13 years. I don’t know if that counts as consistent or not?

    I came across this one pattern in 2002 which i heard about on a podcast of all places. Its a regular market pattern that still works as the basis for a trading edge even to this day.
    There was another pattern i noticed myself in October 2004 and that one still holds up to this day as well.

    At the end of 2010, after my first losing year, i was motivated to do a lot of backtesting and i found 3 more patterns which looked like they had potential but they never held up in live trading.

    So i just stick to the two edges that have held up for 13 years. And dropped the others in found in 2010 after a few years. So there could definitely be be survivorship bias going on in my trading. But 13 years is a long time (and those edges worked prior to that time as well).

    Could these edges stop working one day? Of course they could and then i would be left with no way of being profitable as a systematic trader. My hope is they will degrade slowly over time rather than just drop dead suddenly one day.

    But that is the nature of trading, everything is uncertain! Can’t really predict when anything will change for the better or worse. Which years will be good and which years will not.

    You just have to go with the flow and hope for the best.

    Try and get your size up to max capacity and fully milk your edges while they still work.
    And talking of max capacity, i believe as a retail day trader your best edges will be found in relatively low capacity systems that most professional hedge funds cant be bothered with. eg something that scales to 100 contracts max and gives less than 100 trades per year. Then you are neither competing against HFT or the Larger hedge funds.

    Liked by 1 person

    • David says:

      Curious I had a terrible year in 2010- could not make money or find trades. As an options trader I ahve several strategies,and within those I have ratios of long and short positions, along with timeframes-so there should never be a ‘cannot find a trade’ scenario. I’m still here after 18 years but do not maximise my account

      Liked by 1 person

  3. This blog post was really good, gave me a lot to think about.

    You mentioned a Bank struggling to create successful traders even after a long selection and training process.
    I presume this Bank was trying to teach a mostly non systematic approach based on some edge the bank traders possesed.

    I think systematic trading is a lot easier to teach, and the old Turtle experiment proved this. I think the majority of the Turtles were profitable.

    The kind of personality profile i would look for in potential systematic traders would be a High IQ
    logical mindset and also strong emotional stability and discipline (NT personality type, low in trait Neuroticism, high in trait Conscientiousness). More introverted than extroverted.

    But i think discretionary trading might require a different personality profile. A high IQ logical mindset seems to get in the way of successful discretionary trading.

    Victor Sperandeo talked about this in New Market Wizards.

    (The initial comment goes in to quote a large section of the aforementioned article/book, which I have for now included in the comment to avoid potential risk of copyright infringement.)

    Liked by 1 person

  4. David says:

    Just rec’d this email again- I was just reading abous successful authors- about 0.01% of the total! Music? I remember the boss of EMI proudly proclaiming they only needed a 1% success rate to be profitable. Rarity of success is in many fields of endeavour, often, in pop music, their merits are questionable.(if not completely unknown!)
    I also read a while back about the value of ‘gut’ feeling. We get familiar with a market- for me FTSE. While it’s a fickle mistress/whatever the male version is, I am familiar with it, and as an options traders yes there are absolutes in exiting trades, I still tend to exercise discretion-more fearful than greedy.To date I have avoided huge profits,and risk control means there is never the risk of ruin.

    Liked by 1 person

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