Holy Grailism and Trading Systems – Why Do so Many Traders Fail?

Humans are hard wired in life to succeed and by definition we measure success by successful achievements. When people try their hand at stock market trading they try use the same measurement and inevitably become stuck in a loop of jumping from system to system tweaking this and that and eventually giving up.

This brings us to what in my opinion is one of the principle causes for the 90%ers of Net-Losers-United which Holy Grailism. The average loser comes up with a good system, however irrespective of win rate all systems can and will go through strings of losses.

What will the average spread better do when faced with the inevitable, a succession of trades going against them?

They lose faith, dump their system, and go looking for a new one. Not everybody will agree with me on this, but I am firmly convinced that a good, robust system, a system that is aligned with how markets work, would have worked in the day and age of Jesse Livermore just as well as today.

Reminiscences of a stock operator is what taught me trading, and that book is a hundred years old. I do not think that markets change, simply because humans don't change, and humans are the ones that drive markets, be it discretionally or through computer models that humans wrote, it's always a human at the end of the day that influences what happens.

Markets just simply are not predictable...

Why are markets not predictable?

Because Markets are nothing else than the collective result of all their participants actions...

Actions driven by hope, fear and greed, on what will happen next. There is no inner logic to markets, there is no system to markets, and there is no secret explanation to price development...

Anything can happen at absolutely any time if somebody influential gets a brain fart and shares that with the media, or if a large enough order pushes a market in a direction opposed to what your clever analysis would have you believe should happen next...

Markets are simply constantly being pushed to and fro by the diverging interests of all their participants, all following their own agenda.

A market is nothing else than a conglomeration of huge numbers of participants all following totally different objectives... You have hedgers, you have speculators. You have fundamental traders, you have technical traders. You have scalpers, day traders, swing traders, position traders. You have participants that see the same price levels, yet for some the price is too high, for others it's too low…etc

Every participant in the markets has a different perceptive, different objectives, and different risk parameters. That is why the notion of predictable markets which follows some inner system is nonsense, and that’s why the search for the Holy Grail to unlock the hidden market secrets is a quest best left to the 90% of net losers.

The market is composed not of an inner logic or system that is separate from its constituting participants, no, a market is nothing but the sum of its constituting participants, each of whom has his own agenda, doing his own thing. Anybody who honestly believes that markets do what technical analysis says they should do next should just watch Mr Soros buy 10 Billion Euros and see what happens to all their clever analysis.

In fact you can generate a random chart of anything, and that chart will look exactly like a real chart of a real instrument! Anybody who honestly believes that a chart of a real instrument will look different than its random counterpart has just never looked at a random chart.

BUT, where academia gets it wrong, is that randomness of markets absolutely does not mean you cannot profitably trade them. Random charts have tradeable trends just like all charts do. The real problem is that people like to believe that they are clever, and that they can, through their cleverness, analyse situations, come up with the correct answer, and solve problems.

Ego dictates that people have a real need to believe that success is their very own achievement, while lack of success is usually attributed to circumstances beyond their control. Look, we know that trading has nothing to do with being right... Brett Steenbarger says ‘...As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability....’

Why do people still insist on wasting time, money and effort on solving problems that do not exist, on trying to outwit what cannot be outwitted, markets that are nothing else than the sum of all our actions ? There is no pattern that tells you what will happen next, BUT you do not need that to make more money than you can ever spend.

Stop chasing the holy grail, stop believing that if you just keep on studying markets you will one day be able to predict what happens next, you do not need to feel that you understand price to get rich. Markets can go up, down or sideways, that is all they do.

All you need to make a fortune is to do what any kid in kindergarten could do, grab a chart, eyeball where the path of least resistance is, jump on board, cut your losses when and as they occur, and otherwise ride that trend all the way until it bends.

Trading is nothing than a probability game.

You create your positive expectancy not through predicting markets. You create your net profitability through your preferred combination of risk / reward ratios and win rate, through either on average letting your winners run longer than your losers with a lower win rate, or by cashing in smaller winners than losers albeit with a higher win rate.

That is all trading is, it's not about being right, it's about making money by understanding that it's just a numbers game.

Next time someone tells you they have a great new system that’s going to beat the markets just give Mr Soros a call and tell him to buy ten billion worth of EUR/USD while watching your friends pipe dream go up in smoke.

Like Exile says, trading is simple, maybe not easy, but simple.

KISS!