In some traders’ quest for experience acquisition they put a premium on speed and quantity. They reason the more trades they enter and the quicker they enter them the better. If a trader enters 15 trades over the next month surely he’s moved further along the progression path than a fellow trader who only enters 5 trades. While this thought process seems logical, one wonders if in their haste these trigger happy traders are sacrificing some of the benefits provided by a slower, more methodical approach. Consider Abraham Lincoln’s description of his learning process:
“I am slow to learn and slow to forget what I have learned. My mind is like a piece of steel, very hard to scratch anything on it and almost impossible after you get it there to rub it out.”
Slowness is superior if the lessons learned last longer. The more tempered approach is likely to provide more time for journaling and reflection. In the beginning stages of using a new strategy or technique I’ve found it tremendously helpful to compile a list detailing anything I did wrong or adjustments that need to be made during my next attempt. Usually after trying a strategy the first few times the list is rather large. Over time it diminishes in size as I fine tune my approach and reduce my stupidity.
The progression of a trader isn’t measured by the number of trades, but rather the number of lessons extracted from them. You want your time allocation to be properly balanced between trading and journaling.
For related posts, readers can check out:
Repetition, Repetition, Repetition
I’ve Seen This Movie Before
The Risk Management Game
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At the same time Taleb suggests in his Dynamic Hedging book to compare traders by profitability and the “activity”: same results from a more active trader would imply more “skill”, compared to the more passive one, whom success may simply come from luck. I may be using the wrong words but i believe the idea is correct.
At the end of the day everything comes down to profitability regardless of approach. So we’re in agreement on that. If more trades = more money, then by all means trade more! I guess my main point was that I occasionally come across traders who put too much emphasis on entering more trades and not enough emphasis on extracting all the lessons that need to be learned from the few trades they’ve already done.
Dmitry,
So does the author believe that two traders who trade for 12 months end up with the same profitability but Trader 1 trades 12 trades but trader 2 50, then Trader 2 is more skilled and Trader 1 more lucky?
I would think just the opposite is the case. If I can fix my car in 3 hours but a mechanic in 1, I would say he is more skilled, not more lucky.
In the end it is about profitability. You are correct. But I think that it is a very broad generalization to say that same profits on less trades equals more luck.
Well it`s playing with words. Sure the professional daytrder has more skill and less luck than some buy-n-hold babyboomer, given they achive a ~equal result in a year.
Over what time period though? At what point do you say that no one is lucky for 30 years?
I mean if you are saying a guy with no trading knowledge whats so ever makes the same as a professional day trader in a 12 month period of time… sure the buy and hold may be somewhat lucky… but how does that make the prof more skilled? If you told me that, I’d say the professional needs to find a new day job if he can’t outperform a novice over a year.
Fixing 1 car for 1000$ is not the same as fixing 1000 cars for 1$, although the result are same.
Why do you consider the daytrader “unskilled” in this example instead of agreeing that maybe the buy-n-holder is simply lucky?
As i said earlier, it`s not my idea, but i agree with it. More activity doesnt imply skill. It implies that when you compare two different traders, with equal returns for any statistically noticable number of years, an active one would more likely be more skilled, psychologically and “technically”; and that the more passive one is more likely to be lucky.
If you`re interestend in this topic all i can do is advice you to read all Nassim Taleb`s book – Fooled by randomness, The Black Swan, Dynamic Hedging. You may not agree with those ideas but they surely are worth the time spend.
Sure, luck is always part of it. Whose to say the trader with more activity isn’t lucky as well? I admit, some buy and holders, have not the 1st clue about trading, so they can get lucky. So lets remove the people who make 1 trade in their life. But I don’t think that is the trader the author is talking about.
I guess I am failing to see the correlation between # of trades and skill level.
It could very well be a part of someones strategy to only have a small number of positions open at any given time. If you read “The New Market Wizards” that is even advice some of the wizards give, don’t over extend yourself.
I could argue, that if 2 traders were given $10,000 accounts to trade for a year, and at the end of 12 months each trader made 20%, or $2,000. If Trader 1 was able to do it in 10 trades, but trader 2 did it in 50, I could make a very strong case that Trader 1 is indeed more skilled. He possibly let his winners run longer, cut his losses sooner, or position sized his trades more appropriately or any combination of the 3. All of which are 3 vital skills in trading. Or in the words of Van Tharpe, Trader 1 has a much higher expectancy/trade than Trader 2 does.
I guess I just don’t agree that over xxx years, if profits are equal, the trader who made more trades is more skilled.
You agree on the idea but argue on the details. Let`s look at your example: profit of 2000$ in a year. Trader A achieved it in 4 trades; trader B got it in 1000 trades. Take away only 1 profitable trade from trader A (bad luck) and his results are totaly different; take away 1 trade from B and the result wont suffer. You agree that making 1 trade may be pure luck. Thing is – this logic scales. 2000 trades = less luck than 4, etc.
Thus trader A is more luck-dependent; trader B is less dependent on luck. Less luck = more skill.
I didnt say that activity = skill. That`s not some law. It simply is what i said – a way to determine which trader is LIKELY more skilled, less dependent on luck.
I actually don’t agree on the idea. I agreed that traders may get lucky. In fact you often read that the worst thing that can happen for a trader is instant success. I disagree that if 2 traders make the same amount of profit in 1 year, the one who had more trades is likely more skilled.
Now you are manipulating the scenario to fit your point of view by taking out trades and assuming it affects Trader 1 more. I could very easily argue, and probably find examples that it is just as likely, that Trader 2 had 3 trades that profited him $5k and the other 997 lost him $3k. Does that mean Trader 2 still likely has more skill?
I guess here is the ultimate question… if Trader 2 is more skilled and makes more trades, why can he not outperform the less skilled trader on more trades?
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