Friday, August 17, 2018

Why do people trade at all?

 It is often repeated that more than 90% of retail traders end up losing money. However, at least in the USA, trading remains quite a popular occupation. So why do people trade at all? My experience of chatting on investment blogs says that a trader usually presents him/herself as a rather rich person who trades simply because it is entertaining except that sometimes it is boring to win all the times.

Real life encounters with traders tell quite a different story.


1. In our local park, my kids easily make tons of new friends. That's how I came to know a weekend daddy.  This old man first lost his business; next, his wife ran away with a significant chunk of his wealth and to a younger man. The guy told me that he trades his retirement account cause he doesn't feel secure about coming years and that his trading was inspired by "a bald guy on CNBC".  Shortly I learned that this nice person with huge black circles under the eyes trades FANG stocks and that he understands only simple trading from the long side. The year was 2016  and he was a happy trader who had recovered all his losses caused by the nosedive of Apple stocks back in 2015.


2. Every other Saturday at 7:30 AM I play beach volleyball with other people from our physics and chemistry departments.   Here I talked with a Ph.D. whose wife and kid stay in India while in the  USA he shares a room with another guy from India. This young person invested ~$1000 in shares of crypto-mining companies and now is reduced to HODL. In his 30's this man who already published ~20 papers is desperately looking for an additional income as his salary is not enough to fulfill basic needs.


I know in person several other guys who can be classified as 1 or 2 or something in between.


My conclusion is that people trade mainly because their financial situation is an unstable one. Indeed   "Almost half of US families can't afford basics like rent and food; some 66% of jobs in the US pay less than $20 an hour."


No wonder that a trader in financially weak position often buys a dream while giving up a part of his/her real wealth. For example, it can be  Facebook shares or bitcoins.  In this case, Wall Street works as a wealth transfer machine where > 90% of retail traders end up losing money.


I think before getting involved with risky trading styles one should try small-scale income trading that works similar to cash flow from real estate assets.


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