Day Trader Meetup Review (Part 1)

A couple months ago I went to a new Meetup for day traders. This is only the second such group I have seen in the state. The other one has a few hundred members but has been inactive for years. The organizers are franchisees of a well-known national trading school that I believe to be a spam-filled money pit. I had met the organizer of the current Meetup twice in the past so I was interested to see what he put together.

I made my way through the wintery cold on a Saturday afternoon to a quaint, Italian restaurant close to downtown. Eight attendees sat around a table with a TV monitor in the room. Two out of the eight seemed to trade stocks regularly but only the organizer was a consistent day trader.

I give props to the organizer for his humility. He claims to make some money day trading but does not profess to make a lot. He said last year he made $30K but lost $10-20K. He’s looking to become more consistent and to that end he started this group as a means to exchange ideas with others. With a smile, he describes himself as lazy: he wakes up in the morning, sets his entries/exits, and then goes back to sleep. He once told me he hits the bars most nights.

Yes, I am giving props to a guy who doesn’t make much because he prefers to be out late drinking on weeknights!

To me this represents something more insidious about the whole lot of retail traders: we aren’t perfect! Nobody is. So why do I get the marketing/advertising face of positivity, of triumph, and of ego all too often when hearing other traders talk? People sound like they’ve expertly got things all figured out. People try to sell others or to garner a following. You’ve seen me write about this time and time and time again.

No, there’s nothing particular about this organizer. He seemed to be a typical, John Doe type of guy.

If only the story would end right there…

The Lemming Effect (Part 3)

The Lemming Effect dovetails nicely with my previous posts on discretionary trading.

The “lemmings” are, after all, getting information about a discretionary trade from the trading log whether they realize it or not. Other thoughts from the trading landscape now come to mind:

• 80-95% of all traders end up failing in their first few years.
• Many popular/outspoken traders disappear over time.
• Discretionary trading has much don’t-know-what-you-don’t-know risk.
• I rarely encounter traders well-versed in system development.

Like a detective trying to make sense of a case, I am now starting to discern a positive feedback failure loop or a vicious cycle possibly taking place with discretionary trading playing an integral role.

As an aside, asking the trader why he initially volunteered to share the trading log might prove to be interesting. Is he selling something? In some cases I suspect ulterior motives. Here, my guess would be that he just wanted to “give back” by contributing to the group. Whether he is actually helping or not is another discussion entirely.

I struggled to categorize the posts in this mini-series. “Financial Literacy” makes sense because I feel it’s good information for developing traders and consumers of the financial industry to understand. “optionScam.com” makes sense because I believe the points about credibility and authority are inoculation against potential fraudsters. I chose “Trader Ego” because I believe this along with greed are what make us susceptible to barking down the wrong path.

The Lemming Effect (Part 2)

Today I want to address two questions that come to mind about the Lemming Effect.

First, what established said trader as a sought-after authority? In fields like medicine, law, or education, regarded experts have diplomas, documented work experience, patents, sometimes high-profile clients, published manuscripts or books, etc. In finance it seems to be more about simple persuasion, which comes with a tailwind given the promise of making money. This is what underlies the Lemming Effect. People saw trades listed in a spreadsheet and never mind whether they were real, to the lemming brain that was enough to crown him “genius.”

Unfortunately in trading, strategies can work for a long period of time until they don’t and catastrophic loss is incurred. Traders get blinded to this by the greed inherent in making lots of money. This is precisely why I believe it is important we do our own work using a complete system development methodology.

The second question I wonder about is what are people hoping to gain by studying that trading log? Without taking a survey I really don’t know. I know it can’t help me and therefore I don’t look at it. This makes me think others are heading down the wrong path since they are rushing to look at it.

I briefly communicated with one member of the group about the Lemming Effect and he totally agreed. He did say something interesting in their defense. He would read a 400-page trading book with the expectation that 99.9% would be useless. If even one tidbit positively influences him in the future, though, then the read would be worthwhile.

That sounds like a huge investment of time for very little, if any, potential return. Is there no better way?

The Lemming Effect (Part 1)

Google defines lemming as “a person who unthinkingly joins a mass movement, especially a headlong rush to destruction.” Coincidentally, the example it gives is “the flailings of the lemmings on Wall Street.”

I have found finance to be a curious endeavor because unlike other disciplines where educational degrees or verifiable experience are regarded to establish credibility, financial credibility is more about being outspoken and visible to others.

I belong to a trading mailing list where some members post their trades every day. They occasionally give some commentary about these trades to help explain the strategy.

Recently, one of the members posted his trading log to the list. He wrote that he would be happy to send this log to anyone who provided him with an e-mail address. Over the next two weeks, I am not exaggerating when I say tens upon hundreds of people I had never seen post before responded with “can I get a copy? Thanks!”

I could speculate and say in the absence of anything, maybe people look to others for a starting point. Unfortunately no Holy Grail exists and even seeing what works for someone else is not necessarily going to work for them. It takes a lot of hard work to develop a personal strategy that will work consistently over the long-term and that work does not include copying others. No free lunch exists. One way or another, the hard work must be done.

Despite my speculation about why, the phenomenon seems quite repeatable. Over the years I have associated with many other traders and participated in many trading groups. Whenever beginners get so much as the tiniest whiff of something that could potentially make them money, they appear to trip over each other to get it no matter how meaningless it might be. This is the Lemming Effect.

The Stealthy Sisters of Spin and Speculation (Part 2)

I believe people often mistake Spin for responsible investing/trading. I suspect the same may be said about Speculation.

Mr. Know It All has admitted to consistent losses from day trading futures. I believe he does this to pass the time. He is retired and where other people pay for golf memberships or for tennis lessons, he pays to day trade.

A part of me does not believe trading/investing should ever be something done just to pass the time. If asked point blank, I don’t think Mr. Know It All would admit this either. [I hope] He would say he enjoys day trading and if he loses a little money on a consistent basis then he can afford it. I noticed early on that when people asked questions about trading/investing, Mr. Know It All was quick to stick his nose in [to an amusing extent] and give answers. Perhaps his day trading makes him feel qualified to seek this ego boost coming in the form of appreciation for his “knowledge.”

Yet, because he’s a consistent loser I regard Mr. Know It All as the last person who should ever be answering questions. What he does is clearly not trading as a business: consistent losses would make for a horrible business model! What he does is clearly not responsible trading/investing, either: consistent losses could land someone in the poorhouse!

I think most people interested to incorporate trading/investing into their lives are at least looking for supplemental income and at most seeking permanent long-term income replacement. I doubt any newbie is looking “just to pass the time” if the very activity done for the purpose of making money would do nothing more than generate small losses on a regular basis. Why listen to anyone who is doing just that, then?

A Losing Thesis (Part 2)

I realized this week how little discussion I have seen lately about trading losses.

Because I believe one of the best ways to improve as a trader is to discuss and study losses, I am a bit surprised more people aren’t doing this. I’m quite sure not everyone around me is realizing windfall trading profits. Is it a matter of ego where people feel ashamed/embarrassed to talk about losses since many regard losing as failure? Maybe people feel angry or depressed and don’t want to rub the sore spot? I talk freely about my losses and you will rarely hear me expressing heroic victory over a win unless I am being sarcastic.

Perhaps people aren’t talking about losses because they aren’t doing any significant trading. I mentioned the woman from August 11 who is currently out of the market. Everyone from that Tuesday Meetup mentioned a full-time job. Mr. Know It All, the day trader from the Wednesday Meetup, is retired so he probably isn’t devoting 40+ hours/week. I know a few others from that Meetup work full-time and hope to learn enough about investing to supplement income. Everyone in my option trading group has a separate full-time job.

It’s quite clear from my experience that the vast majority of traders do so part-time. The level of commitment among part-timers ranges from serious/intense to intermittent/zero. When trading part-time, it’s easy to close a position or two and not be trading at all.

One other thing is quite clear to me as well: people doing no trading are not developing as traders. Luck aside, if they want to make consistent money in the markets then they need to consistently work and develop the craft. I believe only the serious part-timers have a good chance to fare well so the rest might as well disappear when the going gets rough to live more comfortably, right?