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- The vast majority of traders, that includes institutions, commercials,
and individuals, lose money.
- Many traders lose all the money in their account or more.
- A random system would only lose costs (commissions, fees and slippage).
I would say the number one reason people lose more than costs is
overtrading/undercapitaliztion. Random events (non-edge trading/trading
with no expectancy) will still produce streaks of one outcome or the other.
The average trader following random signals or impulses loses all his/her
money during a 'bad streak'; therefore, he/she is not around for the random
'good streak' to come along and even out the returns.
Traders also underestimate the impact costs have on their accounts. If you
made three trades per week, paid $30 in commissions, and had $60 of
slippage per trade, you would spend $14,040/contract in costs for the year.
That, I would guess, would wipe out quite a few people on this list.
Overtrading/undercapitalization really becomes a problem if one hits an
early random 'good streak'. This is the WORST thing that can happen to a
new trader. The trader becomes convinced of his/her system's/methodology's
effectiveness and increases the already overleveraged trading at an
increasing rate. Then, when the random 'bad streak' occurs, all the
profits, the original investment, and maybe more is lost very quickly much
to the dismay of our hero. Unfortunately, our hero may hold on to the
early visions of granduer and replentish the account several times blaming
his fate on others or circumstances.
Our own psychological pitfalls of greed, laziness, fear and self deception
lead to a lack of discipline and control. Without discipline and control
the trader will not develop a market edge and is doomed to repeat the same
mistakes.
In the long run the costs actually break us bringing a lot of blame on the
broker.
Overtrading/undercapitalization cause us to suffer returns worse than
random.
Scot Billington
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