Thursday, March 29, 2012

Trading as a Career

I took a class on entrepreneurship, and I think that stats are like 2/3 of all start-ups eventually fail.  At first, that sounds like an awful proposition except if one plans to become a trader.  Most statistics I have read peg trader (retail) failure rates at around 90%.  I always wondered how that could be - you would expect 50% of traders to succeed merely my chance right?

Ignoring all the hundreds of other reasons why most retail traders fail, lets look at the distribution of pure luck on portfolio returns.  In this simplified world, traders either gain or loss 50% of their portfolio every day (this isn't meant to be realistic but just to show a point - think of leveraged ETFs).  After 10 days, here is the cumulative distribution of returns of 1000 traders.

The interesting thing to note is that over 80% of the traders have a portfolio less than their starting capital (1). A small amount have tripled their portfolio while a small minority have made a killing (>20).  This very contrived example shows through the nature of geometric returns the odds are very against you.  So if you think becoming a trader will lead to quick riches, you might want to re-evaluate your plan.

No comments:

Post a Comment