how to lose at trading

consider an asset for which daily returns are independent and identically distributed with mean zero.

can any trading approach create positive expectation?

no. there's nowhere for returns to come from.

can any trading approach create negative expectation?


1) every trading approach apart from staying out of the market has negative expectation because trading costs money (fees, spread, market impact.)

2) the bigger you size the position, the more likely it is that you will experience negative returns bigger than your account equity and realize a total loss.

3) if you expand your horizon to longer than a day - your expectation will be negative if you take any position because returns are volatile. if it goes down 50% you need to make 100% returns to break even. logs innit? the more you size up, the bigger this "drag".

of course, this generalizes to more complicated price processes too...


if you like losing money:


if you like money:


it's a helluva lot easier to lose money than make money.

but it's actually quite hard to lose a lot of money quickly if you avoid doing really dumb stuff.

if you avoid trading too much, trading too big, or trading illiquid costly stuff, the noise trader gets far better odds (well, less bad odds) than the roulette enthusiast.