Retail Trading - What's the catch?

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guess_who

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I'm a software engineer by day. I was asked to code and backtest a Forex strategy for a friend of a friend two years ago as a nixer. On completing the work, I was at loose end and in lockdown, so I decided to download some books on forex. I just wanted to get a better understanding of what the forex strategy was actually trying to do. From that point on I've spent many an evening and weekend reading up on retail trading. I developed two strategies that use a combination of fundamental and technical analysis, so I decided to open a demo account on MT4 with IG to see how they'd perform in that environment. I've been trading the S&P500, some metals, and also two of the major forex pairs with them for the past twelve months. I've backtested the technical parts of the strategies also. The strategies are far from perfect but they are consistently profitable month-on-month. The win-loss ratio is no match for the strategies I read about online, but they do return a nice profit.

I'd love to see how these strategies would fair in a live account but I keep reading negative comments about retail trading. People keep saying that you are going to lose all your money and that it's a scam etc. I've researched the differences between demo and live accounts, and I know that demo and live accounts are slightly different but I'm can't grasp where the catch is. Why will my strategies that have been working reasonably well in demo accounts flop so badly in a live account?
 
It could be that it's like picking up pennies in front of a steam roller. The gains are small and consistent, but the risks are huge, and when they hit, you will be wiped out.

And, if 1,000 people try different 1,000 different random strategies, a small number of them will succeed over the period of study. We won't hear about the rest. But we will hear and read the back-testing of the 20 successful ones, and then be flaggergasted when they revert to the mean as soon as we invest.

Brendan
 
A good example is betting on roulette.

If you keep doubling your bet, you will always win.

So bet €1 on black, and black comes up, you win €1.

Bet it again, and if red comes up, you lose €1.
So the next time bet €2 and if black comes up, you win €2, so your total win from this second series is €1.

Then you run into 4 reds in a row but black comes up on the 5th roll.
1) Bet €1 - lose €1
2) Bet €2 - total losses €3
3) Bet €4 - total losses €7
4) Bet €8 - total losses €15
5) Bet €16 , black comes up - cumulative win €1.

So your "system" is working.
But eventually you will hit a run where you lose everything.

Brendan
 
Brendan Burgess said:
A good example is betting on roulette.

If you keep doubling your bet, you will always win.

So bet €1 on black, and black comes up, you win €1.

Bet it again, and if red comes up, you lose €1.
So the next time bet €2 and if black comes up, you win €2, so your total win from this second series is €1.

Then you run into 4 reds in a row but black comes up on the 5th roll.
1) Bet €1 - lose €1
2) Bet €2 - total losses €3
3) Bet €4 - total losses €7
4) Bet €8 - total losses €15
5) Bet €16 , black comes up - cumulative win €1.

So your "system" is working.
But eventually you will hit a run where you lose everything.

Brendan
Click to expand...

That is only true if you bet the house eachtime.

I read a spreadbetting book a decade ago and there was a large section on 'risk management' which boiled down to only ever bet 1-3% of your portfolio on a trade and set strict stop losses (cut your losses).

The challenge is removing personal emotions! The scam of retail trading can be the roulette strategy posted by Brendan

There is no investment strategy that wins 100% of the time.
 
Dublinbay12 said:
That is only true if you bet the house each time.
Click to expand...

I don't understand what you mean by that?

Dublinbay12 said:
I read a spreadbetting book a decade ago and there was a large section on 'risk management' which boiled down to only ever bet 1-3% of your portfolio on a trade and set strict stop losses (cut your losses).
Click to expand...

That is a different issue altogether? You appear to be referring to the Kelly Criterion which I think assumes a positive EV for each bet.

We don't know the OP's system but it's likely to be a series of small wins at the risk of a catastrophic loss.

Brendan
 
Brendan Burgess said:
I don't understand what you mean by that?



That is a different issue altogether? You appear to be referring to the Kelly Criterion which I think assumes a positive EV for each bet.

We don't know the OP's system but it's likely to be a series of small wins at the risk of a catastrophic loss.

Brendan
Click to expand...

Whether you use the Kelly Criterion or an alternative approach it is a risk based approach to minimise losses. Without knowing the OPs strategy you can't assume there is a risk of catastrophic losses i.e. you assumed in your roulette example that the OP is continually increasing his bet.
 
OK, I see what you mean.

We don't know the OP's strategy, but I am guessing that it's small gains with a risk/expectation of a total loss. Which is why I gave the example of the roulette. The player appears to be winning for a long time and then it blows up.

Brendan
 
Try it. Stake your self a fixed amount every month and see where you are in a year.

Wether you are up or down you will learn a lot along the way.

When I was young and my money was my own, I put a weeks wages into a speculative investment every month or so.

I never doubled down or reinvested each investment was separate. I made further investments as I could afford it.
 
Try it only if the amount you put at risk is not a large multiple of what you gain and if the bets are short-term.

For example:
If you stake €1,000 and you gain or lose €100, that is fine.
If you stake €1,000 and you stand to gain €1 most of the time, but lose the €1,000 if everything goes wrong, then avoid it.

If you stake €1,000 and win €100 60% of the time, and lose €100 40% of the time, that is a good system. It won't take you long to build up sufficient profit to cover the stake.

And be brutal about your records. Record every win and loss - especially your losses.

Don't say "Well the system would be profitable if only the Russians hadn't invaded Ukraine - therefore I will exclude that loss from my total, as it's exceptional"

Brendan
 
Many thanks for your replies. Some really interesting posts. Every successful trader that I've read about has emphasized how important risk management is in trading, not just retail trading. As noted above, I risk 1%-3% of my portfolio on an individual trade. If my SL is hit then the position is closed. I limit the number of open positions that I have at one time also to two. I cut my losses off at the knees, and I let my winners run to their TPs. My risk reward ratios are 1:2 and 1:3.

Aside from the roulette strategy that Brendan posted above, I'm still struggling to understand why the results of a strategy in a demo account will be so different from a live account.
 
guess_who said:
Aside from the roulette strategy that Brendan posted above, I'm still struggling to understand why the results of a strategy in a demo account will be so different from a live account.
Click to expand...
What leads you to think there would be a difference? It sounds like you understand the need to control risk so your downside should be limited as long as you stick to your strategy.
 
guess_who said:
I'm a software engineer by day. I was asked to code and backtest a Forex strategy for a friend of a friend two years ago as a nixer. On completing the work, I was at loose end and in lockdown, so I decided to download some books on forex. I just wanted to get a better understanding of what the forex strategy was actually trying to do. From that point on I've spent many an evening and weekend reading up on retail trading. I developed two strategies that use a combination of fundamental and technical analysis, so I decided to open a demo account on MT4 with IG to see how they'd perform in that environment. I've been trading the S&P500, some metals, and also two of the major forex pairs with them for the past twelve months. I've backtested the technical parts of the strategies also. The strategies are far from perfect but they are consistently profitable month-on-month. The win-loss ratio is no match for the strategies I read about online, but they do return a nice profit.

I'd love to see how these strategies would fair in a live account but I keep reading negative comments about retail trading. People keep saying that you are going to lose all your money and that it's a scam etc. I've researched the differences between demo and live accounts, and I know that demo and live accounts are slightly different but I'm can't grasp where the catch is. Why will my strategies that have been working reasonably well in demo accounts flop so badly in a live account?
Click to expand...
I spent 32 years in the financial services industry designing, writing and selling trading, performance and attribution applications. And I can say without hesitation that I don't know a single trader that survived that long. Yes I know lots of people who made a couple of great killings, but eventually lost it all again. This is one place being the picks and shovels vendor is the best strategy. It easier find say 500 people willing to pay you 50 Euros a month to use your software than trying to be very lucky over a 30 year period.

Even better if you can flog your software to a couple of asset management companies.
 
Jim2007 said:
I spent 32 years in the financial services industry designing, writing and selling trading, performance and attribution applications. And I can say without hesitation that I don't know a single trader that survived that long. Yes I know lots of people who made a couple of great killings, but eventually lost it all again. This is one place being the picks and shovels vendor is the best strategy. It easier find say 500 people willing to pay you 50 Euros a month to use your software than trying to be very lucky over a 30 year period.

Even better if you can flog your software to a couple of asset management companies.
Click to expand...
Some achievement to sell trading applications for 32 years that never worked.
 
guess_who said:
Many thanks for your replies. Some really interesting posts. Every successful trader that I've read about has emphasized how important risk management is in trading, not just retail trading. As noted above, I risk 1%-3% of my portfolio on an individual trade. If my SL is hit then the position is closed. I limit the number of open positions that I have at one time also to two. I cut my losses off at the knees, and I let my winners run to their TPs. My risk reward ratios are 1:2 and 1:3.

Aside from the roulette strategy that Brendan posted above, I'm still struggling to understand why the results of a strategy in a demo account will be so different from a live account.
Click to expand...
If , like Brendan, you don't understand the difference between gambling and trading don't waste your money starting.

Your risk reward ratios are largely irrelevant. The money value of your successful trade v losing ones is what counts.
 
guess_who said:
Aside from the roulette strategy that Brendan posted above, I'm still struggling to understand why the results of a strategy in a demo account will be so different from a live account.
Click to expand...
You don't lose money in a demo account so you won't experience the stress. Stress can lead to errors / lack of discipline.
 
demoivre said:
Some achievement to sell trading applications for 32 years that never worked.
Click to expand...
Oh the applications work as does all the data provided and the training.... it's just that even with all of that you still need to have a lucky streak to run for say 20+ years to win and that is not likely to happen.

The seductiveness of the math is what gets most people - lovely charts make people forget what they are actually trying to do - predict human behaviour and math is just not a good tool for doing that, but it does look pretty.

As for customers, there are always people out there who think if they buy enough software, data and training they will eventually win... and most of the asset management companies will at least pay for a couple of years subscriptions just in case... everyone pays for Bloomberg, Reuters and FactSet, even though at the end of the data there is very little difference in the data provided. And I believe there is a new French company, who's name escapes me, now that is quickly become the got to have one (in addition to the others of course)

Like I said, you want to make money in trading - sell the picks and shovels.
 
demoivre said:
The competent trader will experience pretty much the opposite. A series of small losses offset by the bigger, profitable trade.
Click to expand...
Thirty plus years tells me he won't, there is far too much luck involved to claim that a competent trader exists.
 
Some of the best traders in the world lose 50% of the time. The main difference is that they know exactly how much they will lose before each trade and will set a stop loss on each trade and take their profit when they hit their target. Risk management/survival is probably the most important aspect of trading.

You have nothing to lose with demo trading but as soon as you live trade it is a very different beast.
You need to be brutally honest with yourself , disciplined and have a set of rules that you do not ever deviate from.

You really need to treat trading as if it was your own company/business.
Very few people get it right. Lots go broke or even worse, go into debt because of bad discipline/not being honest with themselves.
 
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