Anyone can make money trading.
You, me, everyone, anyone. Even a turtle (Read here).
We can all make money trading! At least that is the reality the world would want you to believe. Every nook and corner of the internet is flooded with fail-safe ways of making big money by becoming a trader. You have books, blogs, paid classes, free classes, online classes, the options are endless.
“Trading” involves buying and/or selling stocks (or other financial instruments) for a short term gain (or loss), with a focus on the price of the security. Day trading means trading within the span of one day and not carrying positions overnight.
I have noticed most traders at some point declare themselves an expert and start teaching how to trade. The whole system is like a ponzi scheme. The ones who become a teacher first, make more than the others.
— Rajat Sharma (@SanaSecurities) September 1, 2019
Searching the term “make money trading” on Amazon India yields over 2000 book results (the number goes up to 9000 books on Amazon USA). They all teach how just a few minutes of your precious time can yield astronomical results. How you and I can become traders, spend a few hours a day, work 5 day weeks with very the convenient hours of 9:30 am to 3:30 pm with most days ending well before the scheduled time or right after we book our profit for the day.
There is no dearth of the rags to riches stories either, of an average joe who found his/her niche in the field of trading, without any prior experience. These, now gurus, are more often than not touring the world and sharing their secret with the select few willing to pay a small sum to attend a seminar (or buy their “bestseller”) which would yield them fruits for the remainder of their lives.
Lack of Knowledge
A simple google search will lead you to a few hundred links teaching you on how to be the next big trader or simply earning a handsome living by making a few clicks. But in reality, it’s a lot tougher to really succeed as a trader. Only when you dive deep into the shortfalls of trading do you reach the real research papers which showcase how trading for retail investors is almost always a losing proposition.
The marketing budget for these trading teachers would be very large considering how deep the real statistics are hidden. In reality, about 80% of all traders quit within the first two years. Now if everyone is making money why would 80% of them quit? Maybe because on an average an individual investor underperforms the market by 1.5% annually and an active trader underperforms the index by 6.5% annually. Another fact is that the average day trader loses by a considerable margin after adjusting for transaction costs. But this is not the information that is belted out to you on all platforms.
The odds are stacked against you
Most humans are wired a certain way, which is often irrational. This tendency has resulted in the creation of the subject of behavioural finance. A few research papers on behavioural finance do try and explain the reasons why retail investors usually lose out when they trade. These reasons are not as far-fetched as one might assume. Human tendencies such as a taste for gambling, overconfidence in one’s abilities and just a simple need for entertainment, all contribute towards the detriment of the retail trader stacking the odds against him/her from the very beginning.
Apart from this, as a retail trader imagine what you’re up against. A trading house with billion-dollar positions, or more than enough to move the market in their favour, sophisticated technology, highly educated staff, cheap trading costs and most importantly years of experience which allows them to act rationally.
A renowned market commentator once said the following to me when he saw me analyzing a chart. “If the conclusion is clear as day, and if you along with every other small punter, can with some degree of certainty conclude the movement based on the chart. Go the opposite way. There will always be a fund house who will also have drawn the same conclusion and also think about this – if all of you are relying on the same chart patterns, then shouldn’t you all win? More the number of people following a system, more you conclude this – it is a self-defeating science”.
0 sum game
As stated previously, the story of the winners in the trading market grossly outnumber the stories of the losers. Well to be fair why would someone who wants to sell a trading book start with “only 1.6% of you will ever really make money.”
We are aware that actively traded instruments like futures and options are zero-sum games. If say you lost Rs. 10,000 on a bad trade by shorting a stock, there will always be someone who won that Rs. 10,000 from you by taking the opposite position.
Now think of the number of stories where an individual has made a few thousand, a few lakhs or a few crores in a single trade. That’s a very motivating story. But now think of the flipside. For every thousand, lakh or crore won, someone on the opposite end of the spectrum has lost that money. One may argue, that keeping a “stop-loss” will prevent your losses from ballooning and I agree. If someone made Rs. 1,00,000 on a trade, it in no way means that the entire money is coming from one person. Let’s assume it’s coming from 5 people, who placed their stop losses at Rs. 20,000 before the other. So, for every one Rs. 1,00,000 winner, there are five people who lost Rs. 20,000. Again stacking the odds against the average trader. Now imagine the innumerable stories you’ve heard of people making large sums of money trading. Multiply that by 5. That’s the number of people losing that money.
Trading is a skill which can, in reality, be mastered by few, that too by undertaking a lot of learning, both academic and experiential. It can’t be learnt by buying a book or attending a seminar. In reality, small traders will more often than not lose money and continue to do so, for statistically a trader even with a negative 10-year track record will continue to trade. Until then, the people making the real money trading will continue to be the authors, teachers, brokers, exchange and as always the government.