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Success vs failure: big gains are good…right?

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    We are continuing our series of posts where we compare successful traders to unsuccessful ones. Last time we look at trade frequency, where we saw that successful traders do not place as many trades. Check out that post here.

    Today we will look at big tradesBig in terms of money – big gains, big losses. This seems almost too obvious – of course unsuccessful traders will have more trades with big losses. And of course, unsuccessful traders will have more traders with huge gains…or will they?  

    First of all, let’s define our terms here. We define “success” as having performance of at least 10% after a 6-month track record, with a maximum drawdown of less than 30%. We also only look at traders who trade at least 5 days per month. We only look at the first 6 months in this research to make everyone equal in terms of their track record length. 

    So, let’s look at the data: 

    The mean number of trades with a return per trade of less than -5% for unsuccessful traders is 47.9. Everybody places a different number of trades, though, so let’s look at the proportion instead: 15.9%. That means that for unsuccessful traders, 15.9% of their trades have a return of less than -5%. When we look at successful traders, this number is only 0.6 trades, or 0.3% of their total. The difference is drastic. 

    Let’s look at big gains – the mean number of trades with more than 5% gain is 35.9 trades, or 11.8% for one group, and just 1 trade or 0.5% for the other. The difference is almost as drastic! But here’s the kicker – the first group is unsuccessful traders, and the second one is successful ones. That’s right – successful traders have ~25x less trades with huge wins than unsuccessful ones! How is this possible? The answer is simple – to be successful, you have to be careful and manage your risk well. You simply cannot sustain a profitable day trading career with 5% trades, the risk is too high, and you will inevitably blow up. 

    The take home message for this post is this – be disciplined, manage your risk, and don’t place bets you cannot afford to lose. 

    Here’s the summary of the research data in a condensed format: 

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