Trading Experience - Lessons Learned

Below is an article from Dr. Brett Steenbarger's TraderFeed blog commenting on a research studying following elite trader performance.  If this article makes you feel discouraged, perhaps trading is not your path.  THIS ARTICLE EXCITES ME KNOWING THAT THE ODDS OF BECOMING PART OF THE TRADING ELITE ARE VERY SLIM, SUCCESSFUL TRADING IS IMMENSELY CHALLENGING, AND THE JOURNEY IS LONG AND ARDUOUS.  IT SOUNDS LIKE AN INCREDIBLE DARE THAT I AM EAGER TO ACCEPT.  EVERY BEGINNING COMPETITOR IS AN UNDERDOG, A SLEEPER, AN UNLIKELY WINNER, OR IN BETTER TERMS...A DARK HORSE.

How Common is Elite Talent Among Day Traders?

In my recent post, I reviewed research that suggests that the great majority of individual traders fail to make money, particularly after commission costs are factored into returns.

Still, the research finds that a small group of individual traders possess a high degree of skill and can earn returns far above those expected by chance. This is precisely my experience working with proprietary trading firms: a small proportion of traders accumulate the lion's share of the returns. Moreover, those same traders tend to dominate the earnings list from one year to the next.

According to the authors of the research, their findings "paint a rather dim portrait of day traders." "Over the typical six month horizon," they note, "using lower range assumptions regarding transaction costs, less than 20% of day traders earn profits net of transaction costs." What that suggests is that the proportion of day traders who can actually make a living from their trading is surely quite small.

That is exactly what the authors report: "We identify day traders who earn substantial profits over a six-month period and analyze the performance of their subsequent trades. These profitable day traders continue to earn stellar returns." Indeed, the very top traders in the research sample averaged earning over $ 1 million NT per six month period, far greater than the average income in Taiwan. Interestingly, however, the *median* six-month earnings for these top traders was $125,761 NT. What that means is that a relative handful of the top traders accounted for the lion's share of the profits.

And how elite was this top group? The authors studied over 50,000 individual traders for their study, and only 386 were part of the top group--less than 1%. When you see how returns were distributed within the top group, however--with the mean so greatly exceeding the median--it is clear that truly top traders are probably about 1 in 1000.

Is this a depressing finding? I do not find it so. Would the distribution of elite talent look any different for musicians, basketball players, research scientists, or chess players? A high and sustained level of success in any of these domains is rare, but it *is* attained and attainable. It is achieved as the result of a developmental process, not as the uncovering of any magic setup or indicator. The single greatest challenge for traders and trading psychologists alike is to harness this developmental process. Are you on a learning curve that can lead to the acquisition of expertise? I can think of no more important question for self-evaluation.

Dr. Brett's comments and responses:
I think experience helps successful traders perceive regime change quickly and respond constructively before they lose much capital. I definitely have seen traders of all time frames affected by regime change. Daytraders are especially affected, because regimes change as a function of hour of day.

These are well-established researchers doing peer reviewed work at major universities. I know of no axe they'd have to grind. The general literature on expertise suggests that it takes at least 10 years to build the knowledge and skills needed to master a domain. I think that can be accelerated under certain conditions in trading, but have seen many short term success stories end in failure. I do think that years of effort and learning are required for sustained trading success