Is it possible to win at trading, without a distinct 'information advantage'?


Any success at proprietary or day trading is down to luck, inside information, or an edge due to circumstances.’ This view was expressed to me by a client participating in a coaching programme I was delivering.- This comment sparked a discussion which turned out to be one of the more interesting ones I have had on this subject. That the client was a major options market maker at a tier 1 bank, only added extra spice. 

This trader, offered himself up as an example: He saw his success as being down to an ability to work an edge which resulted due to favourable circumstances. The circumstances; his position at a major tier 1 investment bank with  vast resources of capital, computing power, client flow and information flow. Additionally as a price-maker, he always had the spread his favour, thus he was able to warehouse risk and optimise the various edges he had from his privileged perch. He felt that any success achieved by being on the other side of the table from him, as a proprietary trader without a 'privileged information' edge, was an impossible task achievable at best with luck.

I disagreed, proffering examples of private traders, bank and hedge fund traders that I had known or known of, who had achieved this feat. I also drew on my own experiences as a trader. My contention was that you could make consistent money through trading by skillfully navigating the markets. For this individual however, there was no budging in his conviction. A conviction I feel was coloured by cynicism based on his experience having worked inside two major tier 1 banks. History since then has shown exactly how much information advantage was tipped in the favour of the big banks. (Libor/FX Fixings, privileged central bank information, sharing of information on clients flows, etc.). In his opinion, any examples I put forward were just people who either did not reveal, or were not conscious, that they had inside information, or were just on the upside of the good-luck/bad-luck lottery.

This trader used an example to highlight the good-luck/bad luck lottery. He claimed it as analogous to participation in a competition based on a random coin toss. He argued that it was analogous to a coin-toss competition involving thousands of people each calling a coin toss. Each time you lost you were eliminated, and eventually there would be one winner. If you repeated that process many thousands of times, there would be a select few who as luck would have it had won a number of times. Those lucky winners may start to think they are good at this.  If you added in the information advantage aspect, then there might be people who had advance information on the coin toss outcomes, they would then win very often and would confuse that success with skill. His argument was not without some merit, however it relies on a premise that markets are random, a point I disagree with. 

My opponent in this argument was not budging, he compared it to the same way you cannot beat the house in blackjack on a consistent basis, unless you can count cards (Privileged information). I  believe poker to be a better analogy for trading than blackjack. In poker the cards are dealt randomly, but how the hands are played is not random, thus the game is now no longer the result of randomness. In much the same way that (in the absence of inside/privileged information) news and data is released into the market in a random way, however people do not react to it in random ways, and thus the market’s price moves are no longer random.

It follows that all market  moves are the results of human decisions (I will ignore Algos for now for the sake of simplicity). The burgeoning field of behavioural finance has revealed over recent years, how people’s decisions are biased: People do not make wholly  independent rational judgments, they are influenced by a host of matters, from the behaviour of the crowd, to their own levels of fear, to predispositions to certain default responses.

I believe poker is a great analogy to trading. It is a game of skill and chance combined, there are good players, bad players, and exceptional players. Poker is a zero sum game, all the money goes to the ultimate winner(s), if there are ten people in a game, the losses of 9 become the winnings of 1. Not unlike trading, where it is believed that only about 5 – 10% of traders are ultimately successful. Of course not everyone can be a champion poker player, but many can be very good at it, and many can learn to be much better.

I believe there is enough evidence out there to suggest that is skill involved in trading success. Often the best testaments are the consistently successful traders and investors themselves, the Buffetts, Mungers, and Dalio’s of the world. Jack Schwager has written about scores of successful traders in his 'Market Wizard’s' books, though cynics may contend that these are examples of the lucky ones, or more probably they may have had inside information, drawing on the constant suspicion which dogs Steve Cohen, as an example. A better example of how skill leads to success in trading is shown in an excellent new book, ‘Momo Traders’, by Brady Dahl. 'Momo Traders' documents ten day traders, in a Market Wizards style interview process. These guys do not have the luxury of capital or backing which may have helped kick-off a Paul Tudor Jones, or a George Soros. Nor do they possess the huge funds and resources which can help develop relationships which might provide ‘privileged information’. These traders,, starting with very small accounts on their own from a laptop in a bedroom, have used skill and have developed mastery to become highly successful day traders. They can boast annual profits sometimes in the millions, and without even a sniff of informational advantage.  

I have known my own ‘Momo traders’, here in the UK and Europe. Traders who are successful without any clearly defined ‘informational edge’ or ‘favourable circumstances’. When I coach traders I often explore the analogy between trading and gambling in card games. In poker there are only ever a small number of consistent winners, and to be part of that number requires more than just knowing the odds associated with each hand. Success requires becoming a master of yourself, your emotions, your behaviours, and your senses. Chance is involved, but the skill is in how you master chance, how you manage yourself when faced with uncertainty, how ‘risk intelligent’ you are. As a 'trader performance coach'  I know how developing people's behavioural characteristics, and how they engage with risk makes a significant difference to their performance. Recently we published an article, can be seen here, which highlighted the extraordinary returns possible from performance coaching. These improvement could not happen if luck was the reason for success. Like poker, the winners in trading do not win every hand, or even very tournament, but they do win over he long run, and that is not down to luck.   

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Steven Goldstein is a Performance Coach working with Traders, Banks and Hedge funds at Alpha R Cubed Ltd.  

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Poker Cards & Chips image courtesy of Mister GC at FreeDigitalPhotos.net