Is Trading Skill, Or Luck?

The answer that I’m sure most new traders will hope to hear is that successful trading lies in being skilled, and that the skills required are learnable, but in my opinion it’s a little of both, each in fair measure.

Speak to any experienced trader and they’ll more than likely be able to share a handful of stories that relate to luck, or a lack thereof.

For me, luck played a huge part in my beginning as a trader.

If you haven’t already read the ‘About Me’ section of my website, when I began trading I initially turned a small £500.00 account into around the +£6,000.00 mark in a short few weeks with no strategy, certainly no edge and nothing but sheer luck.

I bought strong markets with huge, huge stop-losses and if trades went against me I simply held them until they eventually came back into profit where I’d close them.

…far from a profitable edge. My strategy was, well, luck. Pure and simple.

No rules, no structure, and absolutely no edge whatsoever.

As ever though, my lucky run soon came to an end when one day, a losing trade didn’t turn back around. It crawled against me, and against me, further down, and further, until I snapped and took a fairly sizeable loss of around the -£750.00 mark.

This certainly put me in my place, and this resulted in me firstly realising how dangerous trading can be, and secondly making one of the most mature, sensible decisions I’ve ever made;

I withdrew most of the profits I’d made, and I invested the money in myself – In proper education via professional traders – leaving a modest amount of money in my trading account to trade sensibly with going forward, with the proven strategies I’d learned via the education in-place.

…this changed my trading, and I never looked back.

Returning then to the question at-hand; Is trading skill, or luck?

Again, I’d say it’s mainly skill, strategy and process, along with of course sources of edge and the discipline to let these sources of edge play out whilst managing risk to keep you in the game long enough for this to take place. But luck in my opinion certainly does play a large part in ones success.

As traders, we never know where or when those huge winning trades, those real year-makers, are going to occur and it’s for this reason that luck begins to creep into the equation.

A good example of this, and the inspiration behind this article in fact, was shared by Linda Raschke within her brilliant ‘Super Trader Summit’ lecture recently [Which you can watch here].

She expands on luck, and a particular lack thereof within her own trading over the years, sharing some fascinating stories. One in particular really stood out to me, this being the story of a set of German traders who traded a mechanical strategy that offered consistent black and white signals, removing the need to predict or guess or use discretion, but meaning that they had to trade every viable signal that was presented by their system, much like the strategies I trade myself.

The traders in question traded what I believe was a momentum strategy that didn’t utilise profit targets, meaning that they never knew when the next huge winning trade would appear, so although they essentially didn’t rely on luck but on a statistical edge, luck would of course invariably prove to enter the equation, as it did when they decided to take one single day off to watch a major German football game.

…what happened?

You guessed it, it was the biggest move within one of the markets they traded of the year, and they failed to capture this. The one, single day they took away from the screens.

Unlucky?

You see, anyone who’s been trading a single approach for into the years will most likely be able to tell you something.

80% of profits often come from 20% of trades.

Being around for those trades really can be make or break.

I’ve certainly experienced this myself, and one particular case of luck – Good luck for some, bad for others – came via my DAX strategy when it presented us with a rare +16.4R winning trade last October and, if missed, although missing the trade wouldn’t have seriously damaged the year’s return as we ended the year with +157.8R in the bank, at 2% risk per trade, taking that particular trade was the difference between an additional +32.8% account gain on that one position alone

…or missing out on this.

And of course, I do know a trader who trades my DAX strategy alongside me – One of the most consistent and focused traders I know personally, in fact – Who did miss that trade, for being away on holiday that week. You can imagine his disappointment and frustration when he returned to see that the move had taken place and that he’d missed out on the win. On the other side of the coin, I also had a trader begin trading my DAX strategy on that very trade …to say he was pleased is one hell of an understatement.

So there you go;

A first-hand example of luck, or lack thereof, playing out for some, and not for others.

Another example of bad luck came via a friend of mine who at one point began trading a shorter-term momentum strategy on a – Get ready for this – 14 trade losing run. Thankfully he was managing his risk at 1% per trade and he knew that the strategy provided edge, so the drawdown wasn’t career-ending like it could very well have been, and he did come away profitable as probability played out in his favour, but, not easy to handle.

Would you have been able to manage risk well enough and have enough belief in your edge so as to see a 14-trade losing run out until probability began to play out in your favour and the losing run passed?

There are so many more examples and stories I could share, some of traders very much on the right side of luck, some unfortunately on the other, but fundamentally my point is this;

Know that luck will most likely play a part in your trading, for better or for worse, and respect this possibility. Make sure that you manage risk so that you can make it through the inevitable bad days, and to keep you there for the good days, because the good days always come around in the end.

Remember; In the majority of cases, 80% of profits come from just 20% of your trades.

Trading is up, then down, then up, then down, until one of those home-runs presents itself …just make sure you’re there when that year-making trade does finally come around.

Food for thought.

– William.

p.s. I initially wrote this article on Wednesday March 6th, but I’ve just revisited to add the below in;

If you follow me on Twitter you’ll have read the tweets I posted earlier today. A first-hand example of bad luck on my part happening in real-time.

…it happens. I can’t dwell on it. As I always say; Next trade.

Line

Leave a Reply