Hello!
I hear that many/most traders lose money. To what extend is this true? I mean like 70% of traders lose money and they end up with their basic salary and no bonus? Or 0.01% ?
Any insight?
thanks!
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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.
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.
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.
Lol 5-10c off mids for a 5000 lot trade. wrong.
90 % of Traders lose money in the Markets ?! Nope. (Originally Posted: 08/22/2016)
Note: I will use the word “Trader” as a vague term referring to day-traders, scalpers, investors & arbitrageurs.
I always bump into articles talking about how “90 % of Traders lose money!”
Nothing is further from the truth; the inputs used to determine the percentage of profitable traders/investors are flawed and irrelevant, here is why:
A significant portion of the samples used in those statistics (retail traders) consists of:
Gamblers, doctors, nurses, lawyers, teachers, engineers.... Now how does taking these guys into consideration when building statistics for a sophisticated industry seem right in the first place?
Showing that a Nurse sucks at forecasting the Market Direction is irrelevant just as it’s irrelevant to call a Trader to provide medical care to a patient in an emergency room and analyzing his performance. Same for asking a Trader to handle a Marketing Campaign or anything outside his field of expertise, he will fail and worse than they fail in trading.
I personally believe that when we want to construct a relevant poll or statistic about the profitability of Traders, only the below types of traders/investors should be taken into consideration:
1) People who have a formal education in Economics or Finance (yes brokerages ask you about your education when opening an account so it shouldn’t be that hard to export the relevant data and study it) 2) Proprietary Traders in Prop Firms 3) Hedge Fund Traders and Investors 4) Traders at IBs although this might not be as relevant as a prop trader since S&T/Market Making don’t necessarily make money from directional exposures.
My idea is that only well informed & experienced participants should be taken into account.
So what do you guys think about this? In your point of view what percentage of traders are profitable if we only take into account the types of participants mentioned above?
Even when we take into account all retail traders, the numbers are a lot better than "90 % loose money".
I leave you with a link to Interactive Brokers showing a proper figure from their Retail & Pro accounts:
https://www.interactivebrokers.com/en/index.php?f=3731
Pretty decent if you ask me.