Are you too stupid to trade?

17NOV2010 0348GMT

Are you too stupid to trade? Sounds like I am being facetious, I’m not. And I’m not only directing the question at you, also at me. Am I too stupid to trade?

They say 90-odd percent of traders lose money in the markets. Can’t say I have ever seen that stat sourced, so it could be rubbish. But I do remember reading this book back in the dim and distant past: The Futures Game: Who Wins, Who Loses, & Why .
I could have sworn it was called The Commodity Futures Game: Who Wins, Who Loses, & Why … it is in the shed somewhere I suppose I could have a look.

Anyway, it doesn’t paint a rosy picture of your average punter’s prospects in the futures market. Neither do some of the studies by Odean etc.

Hence, the question: Too stupid to trade? Like I said, serious question. How do you answer it?

Have a look at this link:
No, No Trade Theorem
http://www.marginalrevolution.com/marginalrevolution/2010/11/fear-of-adverse-selection.html

Go on, click it, read it. I’ll wait, no rush.

OK

So there is one way to answer the question. Meet your fellow traders, suss out the competition. While it is unlikely that your broker is going to set up a meeting like Lippman did for Eisman & friends, there are ways of ‘meeting’ the competition. Web forums, for example. Check out some of the trading and investing web forums around. There are some smart guys/gals there. Some. There are a great many more less-than-smart guys/gals there too. That’s good news.

I am being serious. And I am addressing myself as well as you, the reader. The link to that post by Alex Tabarrok talks of ‘adverse selection’, quoting Lewis to really bring the abstract concept to life. So, go ahead, do the assessment. Do it honestly. What do you think?

Another method is to monitor your account balance, and the metrics that traders monitor: win rate, average win/loss size, and so on (check this out for a start: The Value of Trading Metrics http://traderfeed.blogspot.com/2009/08/value-of-trading-metrics.html ). This will help you measure your performance and maybe to help you assess the competition that doesn’t take part in web forums. I.E. If your metrics are not what you want them to be, someone is taking your money.

OK, now what if you are too stupid to trade? (Or maybe you are not, but would like to improve?) Stay tuned for the next post (or maybe the ones after the next post), where I will have a look at how to get better.
(Sneak peek: Six Keys to Being Excellent at Anything http://blogs.hbr.org/schwartz/2010/08/six-keys-to-being-excellent-at.html )

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