The Simple Reasons 80% of Private Investors Lose at Trading
From the time I wrote my first book on Trading Online, over 20 years ago, published by Financial Times, it was clear a lot of private investors were profit fodder for brokers. So many would plough into trading without a second thought to what makes the few money and what makes the many losses.
Indeed in one of my ‘Diary of an Internet Trader’ columns in the Financial Times I recall writing ‘Never in the history of wealth hunting have so many, lost so much, so quickly.’
Speaking as a hedge fund manager, I can tell you the reasons for their losses are simple.
Among the most important are:
1. Hedge funds use algorithms that means trends have shortened
2. Good traders do not get all trades right. About 50–50. And that can make them profitable. Neither do they go looking for the holy grail so are not ‘strategy hunters’ but consistent in one approach with tweaks. Equally it means they do not therefore add to their losing positions in the hope of eventually being right, or hold onto losing positions longer than usual in the hope of being ‘right’ and thereby locking valuable capital in ever larger losses and missing opportunities elsewhere as a result.
3. When they are right they make more, than when they are wrong — sometime by adding to winners, thereby starting small and risking profits made in that position to make even greater ones. ie when they strike oil, they don’t put a lid on it and walk away.
4. They don’t get to pick tops and bottoms (since they are not psychic) . Save that for the conference speakers and their magical Fibs and fibs.
5. They lag after a move, not get in too early. If you don’t like lag, go find a crystal ball and ask Winton Capital how their founder just donated $100m to Cambridge University, when they openly advertise they get into a trend after a lag.
6. Hedge funds if they move their stop loss further out due to increased market volatility, then reduce their position size so as not to lose more money as a result. They understand the link between volatility and money management.
If you don’t like the truth and want claims of being right all the time, and god-like prescience, you should not trade at all. We teach more based on our trading books and experience at www.trading-champions.com
The author is a hedge fund manager and www.24option.com Partner