How Important is Luck?

Q. How important is luck?


A: I believe luck plays a limited part in stock market trading if you have a good system which has an edge. Take roulette at a casino - you know that the house has an edge as roulette pays 35 to 1 on 36 numbers and they have a zero. So you know that in the long run, regardless of what system you use, the casino will always come out ahead as they have an edge. Likewise if you have a proper trading system your edge should ensure that you come out in front over a long period of time.

P.S. Beware the gambler in you! Don't chase losses and accept that on some days you will have losing trades (which is fine if you keep them small). Also, avoid trying to hit it big; in most cases it is often better to aim for smaller consistent wins which are much more readily achievable. Trading often requires you to make many trades to really build up substantial sums of monies.

Q. How much does luck play a part in a successful trader, if it does at all?

The possibility of luck and trading has always been one that's fascinated me...A pal of mine started trading about 3 years ago after inheriting £10,000 from one of this relatives. He said he didn't want to just leave the money in a bank account so he created a spread betting account with one of the big providers and deposited the full amount in. He had no knowledge of the basics of trading or how spread betting worked or none of that. He started off by betting a pound per point on a number of shares and slowly but surely saw his account size grow. At this point he knew the basics of spread betting but hadn't read about trading strategies, read trading books, developed ideas from forums, none of that. He was just betting on what he thought would go down, and also what he thought would go up. He then started to up his bet size to £10 per point and he said at this point he had a largish loss and realised all the time he was spread betting at the start he was literally one bad market move from being wiped out. He kept going on, just trading off the fundamentals and looking at candlestick charts. A year later, he was just under £500k up. In a year...

Which brings me to my point, how much does luck play a part in a successful trader, if it does at all. In my opinion, he was extremely lucky. I remember years ago thinking successful traders must all be uber intelligent, shrewd and savvy but my friend certainly isn't and others I have come into contact with who are 'successful' traders didn't come across as particularly bright either. I suppose for every story like the one mentioned above there's 10 that detail the exact opposite, so that's probably an indication that luck does have some part to play.

Beginner's luck is rare, although not impossible: "A Capital Spreads client opened an account and placed the first bet on Google at £1 point just after the stock had floated. The spread trader left the bet unchecked for months but on eventually checking it out, he found a £20,000 profit waiting.

A: My take on this is that the majority of trading systems return a random distribution of gains and losses. This holds true for both negative and positive expectancy trading systems. Moreover, other random events can happen that influence an outcome. These may be external factors beyond your control, or changes in trader behaviour due to psychological issues, health issues, the weather...etc.

There's a random outcome as these two random components interact. Luck plays a major role in practically everything you do. The key distinction is that some people have the ability to recongnise that and exploit the opportunities, and some don't.

If he was spread betting equities then I'd suggest his only *luck* may have been being involved in the bull market, or the bear market rally that we've witnessed over the past twelve months or so. However, was he lucky to find spread betting as a career choice, to develop an edge (whatever his is, he must have one), to hold his nerve, to up the stakes to perhaps 50 ppp, to make himself available to take every opportunity, to have the self-discipline to stick to his plan, trade through the draw down days...?

You also have to understand that you can sometimes be in the right place at the right time and not believe your own hype. For instance at the present time I have a position running x,y,z reason. It never really lost money (inside my tolerances) and now it is starting to make some serious dough. The motive behind the trade was genuine at the time but the reasons for it currently making money are not those I anticipated. Am I lucky? maybe, am I good? probably not. Either way I have made money and am likely to take it off in next 24 hours.

Lucky just means you beat the odds, over a prolonged period of time the probabilities have a tendency to 'fix' you. In other words need time to reveal the skill and filter out the noise of luck.

 ...Continues here - The Power of Compounding

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