To choose the life of a day-trader is like choosing to be a professional Russian roulette player. Even if you are lucky and win every day, you are still balancing those wins against the chilling thought of that future bullet. Even if the downside risks of day-trading aren’t quite as high as Russian roulette, there is very little real satisfaction to be found on the up-side in either activity.
For the last year, I’ve occupied myself as a self-employed day-trader. A few months ago I slowly began to realize something important that has made me decide to stop being a short-term trader. It was an epiphany I had about the relationship that existed in my mind between the trading “skills” that I felt I had developed, and the contribution those skills were actually making to the outcome of any particular trade I made. I began to realize that statistics (random chance) played a much heavier role in my success than my own skills were playing. In fact, probability played such a large role in every trade that my “skills” as a stock picker were marginalized by comparison. Had I revealed a little-spoken lie that lingers below surface the field of day-trading? Retail day-trading is not a skill-based occupation, regardless of how it is perceived by the participants. In fact, the more I considered it; the lie that trading skills play a role in success doesn’t just linger beneath the surface, it completely supports the field of day-trading and is its premise!
It became completely clear once I realized this: If an activity is fundamentally driven by random chance, then there is no way to succeed at that activity unless that success is also random chance. With true short-term randomness, there are no actions that a participant can take that will remediate that randomness. This meant that any “skills” I felt like I had developed were really the result of operant conditioning, not the functional result of their success. The most simple-to-understand examples explain why nobody practices rolling dice or Russian roulette. It is because there is a 5:1 chance of being wrong in dice, and a 1:5 chance of being shot in the head in Russian roulette. With these sour odds people quickly realize that there are no “skills” one can master to make the odds better. With day-trading however, luck is deceptively closer to the surface. To begin with, in trading there is a roughly 1:1 chance of being right because there are only two directions that a price can move. Up and down. When gambling on a system whose odds start at 50/50, because the odds already seem so close, it is easy for a participant to believe that there are actions available for them to take that will push the odds in their favor . Therefore the day-trader is given many randomized opportunities to experience success and failure. This “belief” that the actions they took played more than a minor role in the successful outcomes is based on the brain’s natural response to operant conditioning, not the statistical reality of whatever skill they perceive that they are employing. If this is true, then it means that a day-trader’s career is totally based on the trader maintaining the illusion of having a skill in his own mind; not actually having a skill. It is superstition as a occupation.
Of course there are successful day-traders. In fact there are only successful day-traders because all of the unsuccessful day-traders are no longer day-traders. That’s a pretty obvious conclusion, but one that most new to the thrills of trading don’t see. The successful ones are the literally the lucky few. The unsuccessful ones sell the books.
So the question I then had to answer was, do I continue trading until odds turn against me, or do I stop trading and start something new? The answer, however unhappy it makes me, is obvious. I’ve had a great experience day-trading, but I can’t trust it as an occupation when there are many other occupations available to me that I can use my real skills at mastering.
To any of you blog readers to whom I give long-term investment advice: My attitude toward long-term value investing has not changed. I’m still happy to help anyone plan their nest-eggs. BTW: My long term portfolio has performed better than 98% of all mutual funds in the marketplace year-to-date! As if this even has to be said at this point; past results are not indicative of future performance.
