Why only a small percentage of traders consistently make money?

General
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Making money through markets appears to be a simple concept. Often, individuals who trade or invest believe they are doing something that is improving them, keeping them engaged and active, a kind of fun, but the easiest part is to start trading and the most essential part is the focus, consistent profit, and final question is do you make a good living?

I was talking with a friend last weekend about how well his trading is going. He reasoned that if I had this much trading capital, I could accomplish a lot. Another guy who has recently begun investing has pooled all his funds in equities with little diversification.

The noise and sad fact about the success rate tweet from Nithin Kamath, " Just 1% of active traders make more than a bank FD over a three-year period."

Today, when discussing this with the same people and, most likely, while reading this, I realized trading is a rather difficult game. Most people I know enter the market thinking short term, and greed kills them by losing money, risking money, and the least risky is making fewer returns than FD.

A few realizations are that having many sources of money, or at least a primary source of income, gives you the gut, removes worry, and mostly helps you stay in the game and pay your expenses.

We all know that while it is impossible to time the market, it is possible to predict the market side. Having the same perspective, how can someone claim or guarantee to create X amount in a month or X returns.

Trading full-time or deciding to quit your career and become a full-time trader is a long shot. Recent events, along with the rush of fresh IPOs, make trading look lovely, easy, and tempting.

It’s gone into deep pondering and many thoughts. Share your opinions on when you believe it’s the correct time one should stop and admit things aren’t working out.

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Wow :clap: The post talks so much about reality.

In my journey in the field of finance, I cannot remember how many spam calls/messages I have received for a sure shot way to earn XXX amount with an investment of XXX.

Although it never fascinated me, one thing stuck in my mind was if they could assure me a certain percent, why don’t they buy the stocks and stop selling advice? And in a country like India, even a small percentage is a very big number, as much as the population of many small countries.

With time and experience, I personally believe, one must not go looking for trades but find them inside your own trading system.

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Trading is the easiest thing I have done in my life to make money. I have an effort less trading style which takes no more than 15 min a day to set up. I don’t feel any physical or mental fatigue in the trading activity.

I have a solid back tested trading plan which I religiously follow. I don’t keep any income targets for myself from trading. I have a trend following system. When our Nifty trends I make money.

Trading is not something that puts food on my table. Its just a supplementary source of income. I am lucky to find what works for me. If you are passionate about trading and is persistent enough you should be able to find what works for you.

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Trading works in a probabilistic way. So any prediction is only 55-45 or similar. Or it can be predictive in weight of returns 45-55 for ex but you win more and lose less.
But you need an edge, without which all else is pointless. And you need capital once you have an edge. And then to compound so that you don’t remain a slave to the market for fixed and uncertain income. In a way trading is very similar to Investing but with far better equity curve, when it works.

My experience is that there is no guarantee. Even with a working system, i do not know what the future holds. And i certainly have no idea what next x trades will do. Draw downs are integral to trading - both in time and in price.
Diversification of income can help with this. Either by trading multiple systems or having external income. Or perhaps having a large capital pool and buffer or some support system so that you are not bothered by day to day and dont need trading income to pay your bills immediately.

But trading works. Its simple but not easy - its a cliche i know, but its true. Simple things can work but execution is tough and refining simple ideas into tradable systems can take some effort too.

No harm in stopping. Trading is not for everyone, and i dont believe it to be easy money. But it works and it can be fun and rewarding ( hopefully in long run too …). There are many good sources of trading info, and many more bad ones too. For me, best and only source has been work of Adam H Grimes. But skill takes time to develop and market is a treacherous teacher. Good luck.

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Nice post Tara.

The way I see trading is…it is like any other business/profession in the world but a little more tougher as it is dynamic and everyday is a new day and needs different ways and approaches to succeed.

Lets say, we want to do coding or lets say we want to be a doctor , we have to go through the course for years and only then we get exposure to the domains where we want to be experts.

In trading, as there is no entry barrier, anybody can enter it and start from day 1. Imagine a doctor treating patients on day 1. That would be scary ryt…thats exactly what happens to most of the traders in the initial few years. I feel its nothing new and is quite natural.

I strongly believe that trading and investing needs to be seen as a Sadhana for first few years and only then the student should enter the martket with full amts otherwise it is a recipe for disaster.

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Nice writeup. These are hard things that people usually avoid talking about, but it is this very thing that keeps us on the right path. The goal should of course be always to work towards that 1% overtime or the closest one can get with one’s situation and skillset, but one should also selectively forget this disparity when actually working.

Because if you are doing anything where “Law of Large Numbers” are involved, the best logical outcome would be to not play at all. But that kind of thinking suits only Robots. Humans take joy not only in the outcome but also in the process itself.

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My two cents is that everyone wants to make money. Most will work their entire life and hope to have saved something for retirement. Very few would try to understand what that amount of money would be. Investing is an afterthought.

It’s not a surprise that most who enter the market leave empty-handed. I remember a friend of mine showing me two iPhones that he had bought only by trading and a few days later calling everyone he knows asking for money to cover the big loss he had made.

For someone who is looking to make money and not great at risk management, it would be better to not trade. Investing in mutual funds might be the way to go.

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I could agree with you to some extent, when you enjoy something, it comes naturally to you. Trading as a way of generating extra money is a nice idea, but as @SpacemanSpiff pointed out, it isn’t for everyone.

One of the reasons I believe trading isn’t for everyone is that the current spike in the number of Demat accounts opened is due to WFH and Covid giving a lot of us free time. To be honest, several of my personal friends expressed interest around this time. I’m not opposed to trading. However, in reality, it takes time to get used to losing money and making a lot of money. To bear such losses and profits, you must be in a saint mode. Which most people can’t do and end up messing things.

Finally, trading as a business. You must come up with a plan to increase your cash flow year after year. If you have that confidence and it is based on your own learning and experience one should go ahead and pursue it. This confidence, however, should not come from someone who advises you or promises to make you wealthy.

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Trading is not something that came naturally to me. I am just an ordinary guy on the street. I had no pedigree in the market when I started active trading. I had no god fathers or gurus in the market. I read, tried several different active trading styles until I figured out what worked for me. A systematic, objective trend following system that I could follow day in day out. So trading is an acquired skill for me. Several people trade with the same system I trade with and are making money. This is again proof to the fact that trading as a skill can be acquired.

When trading I wish to be like how Dandamis (saint mode) was to Alexander the great (market). But I more relate to how Mohammed Ali was to George Foreman at the Rumble in the Jungle. Foreman was one of the greatest punchers of all time. He had knocked down his competition to world title including smoking Joe in the second round. Nobody gave Ali a chance. But Ali leaned against the rope, ducked and swayed away from foreman trying to punch Ali hard. As rounds went on, foreman got tired and that is when Ali landed the telling blows knocking foreman down. In trend following I keep myself afloat with adequate capital to absorb around 30% drawdown that can happen when Nifty is in non trending mode. When Nifty trends, I land my profitable Jabs.

Having adequate capital which I don’t mind loosing, no pressure of x% target and a regular job to meet the worldly needs keeps the mind sane. 30 yrs backtest data and near 5 years live trading results don’t lie which give me the trust and belief to persist with my objective method of trading. I reiterate - if someone is willing to follow a set of rules which is part of a profitable well tested and rounded trading plan, it is possible to make money from the market.

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Agree 100%… While the catch here is follow. What @nithin mentioned is over a 3 year period horizon. Many get lucky when they enter the market and make money in first year. But that is mainly because the Market was trending up. They get carried away thinking that it is easy to make money. When the market turns south during coming years, they don’t know what to do, as they have not spent time in making a trading system, make set of rules to follow. Then they subscribe to telegram channels ( then lose some more money ).

In my opinion the combination of tested trading system, evolved psychology to follow the rules and No target % pressure will make on profitable over long years

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Yes. Time is true test of a successful trader. When backtesting it is important to test over a large set of data covering diverse market conditions - bull, bear, flat, volatile and across diverse instruments to validate the system under diverse kind of data patterns. Systems optimised with bias towards up or down markets fail when markets trade against the biased set up.

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@t7support

May i know what kind of backtesting are you talking about ?

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Once you have a trading idea or logic that is converted to a code / script. This code / script is then used to generate trade signals (Long / Short with appropriate exits like profit / stop loss) by running it over historical data. The generated signals are then evaluated to generate system performance metrics. An allied activity is optimization of the system by adjusting the parameters to achieve the desired system performance. The whole process is data driven and aided by a computer software.

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I have dipped my hands in intra day trading and I can say with fair bit of certainly, that this is a job which required more mind work than brain work. Anybody can read and analyse charts but sticking or exiting the trades is the most important part. If trading was so easy, then everybody would have been minting money.

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It boils down to this - Do you have a trading plan ? If you do can you follow that plan ?

As much as luck matters, it tends to favour the prepared mind that is willing to persist.

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The whole trading mantra to stay in the game for longer duration can be summarized in one simple 2x2 matrix strategy :
Small Big
Win Win
Lose Lose

If we can avoid the 4th box, we are through.

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Why only trading, isn’t that the case with every sphere of activity?

A simple rule of thumb for long term success in any field may be spelt thus:

less than 1% may be spectacularly successful;

another 10-15% will be moderately successful;

of the remaining 85%, nearly 25% will be just about successful (like tired swimmers just about managing to keep their head above the water);

and the balance 60% will be losers.

Note: The most interesting point is at least one third of these 60% losers will have hard luck stories to tell, some real, some imaginary. In a speculative activity like trading, however, over 80% of those 60% (that’s close to half of the total population) will genuinely believe they could have won but for the hard luck . :stuck_out_tongue:

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Yes I agree…Success ratio in any field will roughly match to success in trading. For me success in any field is often a product of passion, patience and persistence along with luck, fate, karma whatever you call that pushes one to the right place at the right time.

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For me success in any field means passion,dedication and how much effort we can give …

Investment is just not a solution …

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thanks for sharing your view
for more understanding, can u share approx how much money u make and with how much capital

not seeking excat values, just approx to understnad how much money can be made in trading with how much capital