My observation over the years is that a significant discrepancy between trading expectations and reality exists among newbies and aspiring traders. Unfortunately this gap between “wishful thinking” and “what-is thinking” can be the downfall of an aspiring trader. What are some of the false trading expectations held by many newbies and aspiring traders?

  • Win rates of 60%, 70% and even 80% can be achieved on a continuous basis – this is especially true if a trader expects to achieve a positive win value/loss value ratio
  • The win rate over a large number of trades will apply fairly evenly to any subset of smaller number of trades
  • A risk of 5% to 10% of capital per trade is reasonable and will produce the maximum profit
  • A trader can know with a high degree of confidence what a given market will do
  • Annual RORs of 50%, even 100%, are achievable if only certain trading systems or gurus are followed
  • A trading account can reasonably be funded from savings, a loan, an inheritance
  • Day trading is the way to go for most beginning traders
  • The secret to trading success comes from trade identification or trade signaling

    • So, what do I view to be the realities of trading?

  • Successful market speculation is one of the most challenging endeavors one can undertake
  • It generally requires three years for a beginning trader to gain a sense for how she or he will trade and five years to become proficient with the adopted approach
  • A win rate of 50% is fabulous for a position trader
  • Even with a win rate of >50%, drawdowns in excess of 30% of capital will occur annually if the bet size exceeds 2% of
  • Trading outcomes over a series of trades are subject to random probability – and random probability can be a real bitch
  • A trader really has no clue what a given market will do
  • While day trading can be a profitable approach, a beginning trader needs to understand the reasons why the odds are stacked against day trading. Hint: the reason deals with the need for a trader to have an “edge.” The reality is that HFT and quant operations have the edge on a daily basis – so a day trader must compete with firms that know spec orders in advance in order to be profitable. I am NOT saying that ALL spec day traders are doomed. I am simply stating that the odds of success in day trading are far less than for position
  • A trader’s worst drawdown is the one yet occur
  • If there is a “secret” to trading, it has VERY little to do with trade identification and It has more to do with overcoming the human pitfalls of fear, greed and false hope.
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