Are consistently profitable stock traders talented or just lucky?

Posted By Scott Philips On Wednesday, December 21st, 2016 With 0 Comments

You hear about traders and hedge fund managers who consistently beat the market, but if you have enough monkeys throwing darts at the Wall Street Journal, some of the monkeys are going to seem very talented.

The short answer is “it depends”. If you are a long only stock picker, and you get a big bull market, mostly it doesn’t matter how badly you trade you will make a lot. In fact, a guy trading badly, not cutting losses, not banking profits to smooth returns, may actually do better than a professional in that situation.

Of course, like Warren Buffet famously said “when the tide goes out, you see who is swimming naked”.

Learning to trade in a benign environment like a long running bull market is very bad, because it forgives bad trading habits.

Is a 45% return over 7 months in the stock market beginner’s luck? I have started paper trading with 50′000$. I created a portfolio of 7–8 stocks and I hold them for about 6 months. I have some financial background so I know 45% is extraordinary. I still don’t understand why it wouldn’t work again. (Sharpe ratio = 2.5)? I’m trying it again now- so far same results.

It is not luck if you had a method/system with appropriate risk management. If you backtested that system appropriately , and kept proper records of both the system and your own performance. If you had a plan for exiting the trades in certain situations and did so when they arose.

If you didn’t have a method for doing things and just “chose what you thought were good stocks” the return literally has nothing to do with you.

It is entirely possible (not saying you did) to trade like a moron and make these returns in the medium term.

I started with 20,000€ in the plus500 demo account and now I have 36,000€ after trading stocks for 6 months. Should I open a real account?

You should trade for real money IF AND ONLY IF

1) You have an objective edge in the marketplace, rigorously back tested against in and out of sample data. For example my edge is that “statistically, buying pullbacks in an uptrend is a low risk place to get positioned”. If you cannot articulate your edge in a simple sentence like this you should not trade

2) You have a written down set of rules for how you manage each trade once you are in it. How large are your positions? Where is your initial stop? How soon do you move your stop to breakeven? When do you take profits? What causes you to exit the trade along the way

3) You have a business plan to go with your trading plan, with every contingency from withdrawing money for taxes to planning for removing money to live off. You know exactly the drawdown point at which you stop trading for good, or the point you reduce size.

4) You have practiced trading your ruleset until you can trade it without making mistakes. A real world mistake rate greater than 1 mistake in 20 trades (95% efficiency) is generally fatal to most trading strategies.

It is possible to make money in the stock market while trading badly. I’m not saying this is you, but if you have not done the 4 above things, then you have just been lucky.

If you have been lucky and want to proceed, work on the above list (it should take about a year of hard work, maybe more) and then trade for small scale until you are certain you will succeed.

Good luck

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