What Is The Bid-Ask Spread On The Stock Shown Above Day Trading – Why 98% of People Lose Money in the Markets

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Day Trading – Why 98% of People Lose Money in the Markets

Almost all people who venture into the world of day trading do so with big thoughts of wealth and easy money. 99% of these people will give their hard earned money to me and others who understand the game. Yes, it is a very difficult game to master and has endless dead ends. It may seem that you are a mouse in an endless maze. You can spend years running through the maze, working on endless ideas and methods, all of which lead to the same inevitable end.. Losing money!

You might be wondering who is this guy writing this article? How he and others supposedly learned the secret of the game. I would like to claim that I have the highest intelligence, but that would not be true. Like Edison, the inventor of the light bulb, if you’ve been doing things wrong long enough, lost enough money, and been beaten down to the point of giving up, it’s only when you get up your nerve that you finally start to see through all the hype about failed systems and steadfast methods from your past.

The simple truth is that the sooner you stop looking for easy money, the sooner you will begin to understand why and how those who win the game gain an unfair advantage over those who don’t.

Everyone’s first introduction to trading is always because someone was sold on the idea that trading is simple and easy if you buy the “right system” or methodology from a time guru. These marketers are relentless in taking your money. They are systems/methodology developers who understand exactly how to manipulate the various components of a system to suit any individual’s taste and temperament. How many times have you been told that you just need to find a system that works for you and your personality. This is a half-truth, because no system will work for you for long unless it is consistently profitable.

Most of the systems sold online today are clear about how to log in, but are so vague about how to log out that they are completely useless. I can’t tell you the number of systems/methods I have personally purchased that are nothing more than outright scams regarding their advertising. Most systems have been tested and optimized to the point where they look incredible on paper, but in real time they just fall apart. It seems that people are willing, even eager, to hand over their hard-earned money to anyone who claims to hold the key to getting rich easily.

Now that you have been warned about the scams and false claims in the industry, let’s discuss one of the main reasons most people lose money. The bid/ask spread when entering and exiting the market, along with the cost of commissions, stacks the deck considerably against those using techniques that try to take small profits out of the market. These costs can easily kill your chances of being profitable. Let me explain that when using the S&P 500 mini contract, the minimum tick size is 0.25 pips or $12.50. When you enter and exit a position, you give up 2 ticks or $25.00 plus commissions to the spread. Let’s say you are using a method where you are trying to reach a target of 2 points or $100.00 with a limited risk of $100.00. Your spread waiver and commission will be a minimum of $30.00 per contract. This means that the position is already deep in the hole before you start. The market will have to move an additional $30.00 before you reach your goal. In theory from a price action perspective, a win is worth $70.00 and a loss is worth $130.00. You have to win almost 2x for every loss just to break even.

The first thing you need to realize is that there is no way around these costs. The only thing you can do is minimize them as much as possible. The only way to do this is to only use trading methods where the profit targets are large enough to reduce these costs to a small percentage.

example:
Price $30.00 and profit target $100 = 30% trade value.
Price $30.00 and profit target $300 = 10% trade value.

All things being equal, let’s say you find a method that is 60% accurate after covering the spread (a very healthy system). It has a risk-to-reward ratio of 1 to 1. (That is, the risk and reward are equal.)

Winner: +$100.00 Loser: -$100

Profit: 60% multiplied by $100.00 = +$60.00 minus $5.00 commissions = +$55.00 Profit
Loss: 40% times $100.00 = -$40.00 plus $5.00 commission = -$45.00 Loss

This very healthy and difficult to develop system will earn you an average of $10.00 per trade. Is it any wonder that most people fail. Because the system I am describing is far better than most available on the market today.

If you’ve been trading for a while, you know the saying, “Let your profits run and short your losers.” This is the basis for many trending systems that have profitable trades that far outnumber their losers. However, this is done at the expense of the win-loss ratio. This means that the more profitable trades, the lower the percentage of winning trades. Most of these types of systems have winners in the 30% range.

An example of this type of system:

Winner: +400$ Loser: -100$

Profit: 30% multiplied by $400 = +$120.00 minus $5.00 commissions = +$115.00 Profit
Loss: 70% times $100 = -70.00 plus $5.00 commission = -$75.00 loss

This is another example of an extremely healthy system that will average +$40.00 per trade.

The systems discussed above are hypothetical and would be considered best in class and worth millions of dollars to the buyer of the system.

The bottom line is, don’t be fooled by the false claims of system developers who promote incredible results and then offer their products to anyone willing to pay them a few hundred dollars. If they really had a system that worked as advertised, they wouldn’t share it with anyone because in a few years they would be very rich themselves without your money.

If a “hypothetical” system performance record seems too good to be true, it probably is. Don’t be the next person to be forced to hand over your hard earned money.

Let’s assume you get really lucky and find a decent system that has a positive long-term profit expectation. You still have a problem, and it’s a big one. In the next article, I will discuss the next reason why you will inevitably fail. If you don’t understand this next block, you’re just as doomed as those who still cling to substandard systems.

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