Jim is a contributor to stockguy22.com and independent futures trader. When he is not trading futures, Jim spends much of his time in airplanes. Jim has traded causally since 1999, going full time in 2008. You can follow Jim on twitter @jimofthemarket.
If you are interested in learning about trading futures, you can find jstantrades in the Stockguy22 Trading Floor each morning.
Stockguy22 Trader Mentoring
Get a trading plan and get a mentor before you set more money on fire.
Most traders lose money, don’t be like them
Do you still lose consistently after years of trading?
Do you know that you should have a trading plan, a journal to analyze past trades, and shouldn't hop from system to system, but you just don’t do it.
Don’t lie to yourself.
"95% traders fail to make a profit" is the common statistic you will see on the Internet when people talk about trading. Unfortunately, the truth is relatively close to the headline, at least in Forex.
Combined, FXCM and Gain have about 260,000 accounts, a third of them in the U.S.
These customers are losing money in spectacular fashion.
At FXCM, 75% to 77% of customers lost money each quarter last year, according to newly required disclosures to the Commodity Futures Trading Commission. At Gain, which operates through http://www.forex.com, the number of unprofitable customers hovered between 72% and 79% every quarter last year, according to its filing.
Gain ended up making an average of $2,913 from every active trader it had last year, even though the average customer account contained only $3,000, according to the company's financial data.
FXCM made $2,641 for every active trader, while the average customer had $3,658.
The assumption can be made that while FXCM's desk is dealing against the customer accounts, futures and stocks follow a similar pattern with traders. The broker/HFT/market maker, counter-party is wiling to take the opposing trade of a small retail trader because the majority of traders lose money. Stock options are no exception, 99% expire worthless.
Stocks have an interesting caveat; everyone can lose. A stock certificate is a simply ownership of an asset. A company sells a stock share to someone in exchange for money. If the company fails to perform then the price of a share goes down, as people are less willing to buy a failing company. Everyone loses when they buy stock of a 'bad' company, except the company and the broker earning commissions. Sure you can short the stock, if there are shares to borrow. Borrowed shares come from someone with a long holding of the companies shares, another loser.
Futures contracts only have a buyer/seller. A futures contract represents an agreement between the buyer and the seller to buy or sell a specific asset at a specified price at a specified date. The types of futures contacts, leverage, and other factors with trading are a discussion for another time.
What the majority of people fail to realize is that, for the most part, trading is a transfer of wealth from losers to winners. That is all trading is. Eventually one party runs out of money.
Mistakes Traders Make
The following empirical facts should frighten you, but they should also make you think about how important being prepared in your trading is.
- 80% of all day traders quit within the first two years.1
- Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. 1
- Profitable day traders make up a small proportion of all traders – 1.6% in the average year.However, these day traders are very active – accounting for 12% of all day trading activity. 1
- Traders with up to a 10 years negative track record continue to trade. This suggest that day traders even continue to trade when they receive a negative signal regarding their ability. 1
- Poor, young men, who live in urban areas and belong to specific minority groups invest more in stocks with lottery-type features. 2
- Poor individuals tend to spend a greater proportion of their income on lottery purchases and their demand for lottery increases with a decline in their income. 3
- Traders don’t learn about trading. “Trading to learn” is no more rational or profitable than playing roulette to learn for the individual investor.1
- Investors tend to sell winning investments while holding on to their losing investments. 4
- During periods with unusually large lottery jackpot, individual investor trading declines. 5
A Daunting Task
If 80% of traders quit in the first 2 years, and 93% quit after 5 years, why are so many services, gurus, and 'holy grail' indicators for sale?
Demand. The primary reason is there is a demand for the easy out. The quick money trader lifestyle sold by many of these individuals is appealing.
National Institute on Retirement Security research finds retirement savings are dangerously low, and the U.S. retirement savings deficit is between $6.8 and $14.0 trillion. The average working household has virtually no retirement savings. When all households are included— not just households with retirement accounts—the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.
The big question that you are asking yourself is this guy for real? How can someone succeed at this if everyone fails.
You have to prepare for trading like it is a job; the best job you can be lucky enough to have.
The majority of people approach trading like gambling. They get a high off of winning and losing. The truth is every trade you make has a 50/50 chance of being a winner or a loser. It doesn't matter how many trades you made in the past. Every trade starts with the same probability.
Since every trade has a 50% chance of losing or winning, you have to control what you can.
Size, Exit, Entry, and Risk
Every trader has control of entry, exit, position size, and how much capital to risk on the trade. With regard to position size and risk, according to a study, if you never risk more than 6% of your total capital at one time and you take random entries, you will be profitable in the long term. 6 Risk too much and you aren't able to come to the party again. You lose.
”If you don’t bet, you can’t win. If you lose all your chips, you can’t bet.” - Larry Hite
It is no secret that we run a trading room, mentoring, and swing trade service on this site. What is a secret, up until now, is the number of emails we get from people who are losing and how each of them shares the EXACT same problems.
- No Trading Plan
- No Risk Management
- No Responsibility for Trades
- Blaming Others for Losses
- No Education or Understanding of Basic Trading Concepts
- No Mentor
- Unrealistic Expectations of Profits
Every single person that emails us and is losing has the same list of complaints and sob story. Here are the most common.
The Blamer ...
"I subscribed to _____ service and they gave me losing trades. I called them out on it and they ignored me." Did they put a gun in your mouth and force to you make the trade? No.
The Hoper ..
"I have $1000. Can I follow your trades and make $100k a year so I can quit my job?" Someone has been reading the trading spam emails and hype. Realistic expectations or risk to reward are sorely needed.
The WTF Expert ...
Many people lie to themselves and others about performance. I recently had a gentleman tell me that he makes 5 figures a month on a $150k account selling puts and buying calls on the SPY, and arbitraging the ES e-mini. 100% a year! That's great. I asked him why he needed a service if he was doing this already with $150k; he could easily scale up the number of contracts for a while without interfering with the market. He then asked for 'alerts with exits and entries', then proceeded to spend 2 days in the Diamond service before telling me all he saw was people guessing about trades. I guess he can see the future. Every trade has a 50% probability of winning or losing. While he can see the future, he says, the rest of us will manage our risk while 'guessing'. I told him to subscribe to trade ideas, tymora pro, or mad scan.
The Mournful Loser ...
"I had my whole account in AAPL options before WWDC and now I'm down 70%. Can you help me make $70k back because I can't tell my family I lost all my money." This person had no idea what they were doing. They just bought calls and when the market didn't go up, they lost 70% of their account in 3 months or less. I offered our mentoring workshop on options and some one on one, the trader declined saying they had to buy a new iPhone. If you can't invest in your trading education, then you are going to lose.
The Rich Gambler ... AKA More Money Than Brains
This type of person is fairly common. They are typically a professional or business owner with an account in the high hundreds of thousands to double digit millions. What is most confounding is they are routinely smart people. Recently, one notable trader contacted us about shorting calls naked into earnings. He had about $10M in risk on to make a few pennies. The excuse was he'd done it 3 times before with no issue. This time the steam roller caught him grabbing nickels. The stock gapped up from $80 to over $120 and proceeded to run after the earnings as high as $124. He got assigned and was now short 100,000 shares of stock at $100 to the tune of a $2M loss. We spent a few hours and gave him a few options to hedge his risk to the upside any further. I don't even think we got a thank you for it. He did have time to m'f Cramer from CNBC about it.
The Follower ... AKA Gimme Da Tradez
We get a lot of these emails. I had one amusing email exchange this year with someone that had no trading plan, no idea about position sizing, but wanted trades. He actually said, "I don't care about your analysis, I just want the trade, just tell me where to buy." He didn't want any reasoning for the trade, he didn't want to think about the trade, he just wanted someone else to gamble his money. I told him to go see a financial adviser because the $69 a month subscription with us is going to be too much thinking for him.
Every trade should have a thesis, a plan, a target, and a stop. When you take a trade, you should understand why you are taking the trade. Ownership of your trades is a first step in becoming a successful.
The System Hopper ...
I developed my own trading system using the tips and pointers that I got from other traders and from reading lots of articles and books on the subject. It works, it's simple, and I own it. Every month we get people buying the next great system for $50 up to $5000 or more. They buy the dream someone is selling and the first loser the system has they move on to the next one. Ultimately they fail to be profitable and just waste time and money, the guy that sold them the $1000 system is the real winner.
If you are going to be successful you have to have ownership of your entries and exits. Get help from us via workshops and mentoring.
And it goes on and on ... the rant
Plenty of people buy the highs and chase breakouts into market extensions then panic out when the market has a 1% down day. These panic buyers and sellers are more common now than they were years ago. In 2009, 2010, 2011, and 2012, the Stockguy22 Trading Floor bought every panic moment in the market. We had a plan. We executed that plan.
Thanks to the bull market since 2009, you now have fools wanting to do nothing but sell puts and use that money to buy calls. We've even heard of some non-directional put and call selling strategies with no plan for a black swan or to keep excess capital for margin events. "We'll just take the shares if it goes below our put strike." Ummmm .. no.
Everyone has forgotten about LTCM. Picking up nickels in front of a bulldozer has one outcome, eventually you get run over. The fund, which started operations with $1 billion of investor capital, was extremely successful in the first years, with annualized returns of over 40%. However, following the 1997 Asian financial crisis and the 1998 Russian financial crisis the highly leveraged fund in 1998 lost $4.6 billion in less than four months and failed, becoming one of the most prominent examples of risk potential in the investment industry.
I'm tired of people asking me for money to trade because they bought calls on a stock we didn't like in a webinar and made 50% on the call options. FIFTY PERCENT! That's not even worth commenting on further when an option has 100:1 leverage. Congratulations on riding a stock up 5%-10% when the S&P was up 27%. How's that Theta decay? Keep buying calls like the trader mentioned above, see you in the food stamp line.
I don't want to start with the social media gurus. Just search around you'll find 'Twitterati' that rail on subscription services as frauds then try to sell you boot camps and monthly subscription chat rooms. Let's just say there are more than a handful that represent themselves as successful on Twitter, but haven't made a real dime trading in 10+ years.
We've seen and heard a lot in the past 5 years of this site. The truth is you don't want to be in the group people of people without a trading plan, and if you already are, stop now before it is too late.
The traders at stockguy22.com are available for mentoring and one on one education. We may not know everything, but we sure know more than 95% of traders who are losing.
All you have to do is use the contact form.
Having a trading plan in place is the only way you will succeed in the long term.
1 Barber, Lee, Odean (2010): Do Day Traders Rationally Learn About Their Ability?
2 Barber, Odean (2001): Boys will be boys: Gender, overconfidence, and common stock investment
3 Kumar: Who Gambles In The Stock Market?
4 Calvet, L. E., Campbell, J., & Sodini P. (2009). Fight or flight? Portfolio rebalancing by individual investors.
5 Gao, X., & Lin, T. (2011). Do individual investors trade stocks as gambling? Evidence from repeated natural experiments
6 Johan Ginyard (2001). Position-sizing Effects on Trader Performance: An experimental analysis
Stockguy22 Trader Mentoring
Get a trading plan and get a mentor before you set more money on fire.
For prospective day traders, “trading to learn” is no more rational or profitable than playing roulette to learn.
- Gao, X., & Lin, T. (2011). Do individual investors trade stocks as gambling? Evidence from repeated natural experiments