Dear Financial Voice Reader,
I write to you before speaking on Friday at the London Investor Show as the keynote. This week I was on BBC talking about market volatility.
I discussed on BBC World News the recent market volatility. It’s clearly headline news when it comes to stocks and of course in forex given Brexit.
You know, one of the most common questions I’m ever asked is what’s the difference between rich traders (the 10% or 20% that make money) and the 80% that don’t? What is it that of all the traders that I’ve examined, the professional traders, the hedge fund managers, and my own expertise and experience as well . . . What is that differentiates the two?
Are men better than women? Is there a certain time of day you should be trading? Are there certain instruments?
Is it better to trade stocks than forex than to do indices or gold or commodities? Do you make more money if you go short then you go long? Are there certain geographies that you should be trading some periods of time?
What if statistically, I can show you that out of a group of 500,000 traders, the ones who held on to a stop or a currency for more than 5 minutes were more likely to lose . . . Or more than an hour or more than 3 days or vice versa than those who held it for different periods of time?
Let me take you through some of the issues, some of the differences that I found between the winning and losing traders. For instance, the poor trader they tended to have a few big losses. Losses where they lost in one trade more than 2% or even more than 1% of their total risk capital. (I use poor trader meaning someone who is not profitable over a long period of time and rich trader being someone who is profitable over a long period of time ie more than a year.)
Whereas, for the rich trader, they rarely, if ever, had such losses. So how do you limit such losses? Well, one of the reasons that they’re rich traders is that they have a small trading size. In other words, they trade a small amount relative to the total capital they have.
Also, they never added to their losing position. Another thing that we found the difference between winners and losers or the poor traders and the rich traders, is that winning trades in the case of poor traders were achieved by simply getting rid of a stop loss.
They were willing to take an unlimited loss in order to have that win (win meaning any, even a tiny profit), even if it was a small win. So they risked losing lots of money in order to have a small win. Whereas, a rich trader, they were happy to have winning trades because their stop loss got hit, even if, therefore, it meant that they had a lot of losing trades. But they were small losses because their stop loss was sufficiently tight, in order that they wouldn’t have big losses.
The rich traders focus was don’t have big losses. That was a key difference. The other major difference was in terms of profit. Obviously, the poor trader—the losing trader didn’t have profits overall. They might have a few winning trades that were profitable in themselves, but they didn’t have profits overall because they had those big losses.