Traders lose money

1738Street:

Retail traders lose money, most professionals don't. If a professional trader is losing money than he will not be a professional trader for much longer.

thanks, so what are the chances for a graduate coming into trading, not to make it to become a professional trader? I know it is an individual thing, but I would like to know the chances?

This is definitely correct, but I think OP was referring to the net P/L of a trader at the end of the year.

If the trade moves against you before you can get out of the trade you still lose money...

You are still taking risk and inventory-ing, not just brokering..

Bid/ask doesn’t really exists anymore. It’s either taken by hft or your doing something exotic and hoping your hedge makes sense.

Assuming you're not in prop, the trades moving against/for you will be normally distributed meaning your P/L will be close to what you made in gross commission over the course of a year.

You are asking if I am constantly calculating what all the other traders in the market think my position is worth? No.

I only have an internship under my belt, but from my experience you determine it off of the markets bid/ask, as well as your opinion of if you'd rather be selling or buying this position, which breaks down into your current inventory and the direction you think it's moving.

if you look at the DOM (depth of market) for any security (a ladder of prices, with bids on the left and offer on the right)...the distance in price between the highest bid, and the lowest offer is the "market bid/ask spread". For example, looking at crude oil futures, the bid/ask spread is typically very tight and keeps the minimum for that market of 1 cent. However, in securities that are not super liquid and don't have lots of trading activity (most stocks, and a few commodities), the bid/ask spread can be much wider (and changes as market volatility changes)...so there is no set rule, other than the minimum increment set by the exchange.

https://d12pmmbqk6r2v2.cloudfront.net/assets/images/pages/lg/TT16_05_31…" alt="crude oil DOM" title="crude oil DOM" />

Then we get to the off screen institutions trading (most all securities can trade "off screen" for sufficiently large size...this is mostly how customers trade with the dealer banks)...if you look closely at the DOM, you will see the actual volumes on the bid and offer are small...but what if you are in the dealer seat at GS, and a customer asks you to bid on 5000 contracts (and the market bid/ask market is 30 contracts at 35 contracts with a 1 cent bid/ask spread...which you will need to use to get out of the position)? Would you show that same tight market for such a large size? No, you would normally back off the market price and show something with a little more room. In this case, you would probably bid 5-10 cents below the market bid for 5k contracts. Otherwise, how do you plan to get out of the position without losing money? You generally assume that your customers trading large size are going to be correct (they usually are in the short term), and so you want to get out as soon as possible. THIS is the job of being an institutional market maker...determining how aggressive you can be in quoting a bid/ask spread for large size without losing money.

Simply speaking the trading day begins with a pre-opening process. Here the exchange or the specialist runs an opening auction process to determine the opening price. Its purely algorithmic and no discretion is applied.

The trading price is set to maximise volume. The filled volume at any particular price is given by Min(Supply, Demand) where buy orders form the demand function and sell orders form the supply function. All buy orders at or above this price and all sell orders at or below this price is filled.

Generally there will be a situation where the volume maximising price does not have equal supply and demand. In this case the earliest submitted orders will be filled.

After the opening period the order book will contain bids below the current market price and offers above it.

The difference between the best bid and best offer is known as the bid ask spread.

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Sell-side traders PnL isn't measured in %. It's measured in $. If someone has a strong track record or management responsibilities he/she may still get paid if their desk or department did well. There is no hard and fast rule.

yeah sky's the limite, then put a negative sign before it.

Definitely true. Traders that set up to make 3x what they risk only need to get 25% of their trades right to breakeven (less transaction costs of course). If you read the first market wizards book, Paul Tudor Jones talks about how he might try to buy the dip in something (or sell a rally) a few times before finally getting it right. This is not my favorite way of trading but right now when trends are barely there, this has been working pretty well.

i dont know, but anything above 50:50 seems good, right?

There is no way you can generalize this. Different styles of trading will have different win percentages, different risks, and different rewards.

A trader that only trades when there is essentially a risk-free arbitrage, will have close to 100% win rate. For example, merger arbs or traders writing way out of the money options.

A trader that goes for the home run may only be right on 1% of trades, but that 1% pays off huge. For example, VC has a lot of failures which are made back by the occasional home run. Same would be true for a trader that goes long way out of the money options.

Any combination off variables that satisfy (% Win) (Reward) + (% Loss) (-Risk) > 0 exists out there and within each style of trading there are their own "bets of the best".