A reader recently emailed me a deceptively simple question: "Why is it so much easier to lose money in the markets than to make money?"
Well, let's look at a few reasons:
1) The stocks and indices most familiar to traders have provided the worst returns.
2) The time frame most comfortable for short-term traders (daytrading) has provided the worst returns.
3) The growth of stock index and ETFs has created automated arbitrage strategies that have greatly diminished market trending.
4) Markets tend to confound human nature by refusing to do in the next time period what they have done in the previous one.
5) Because of the above, following normal human sentiment makes people lose money in the markets, almost as if the game is rigged.
6) Because markets change their trending and volatility over time, we'll always tend to be most confident just as things are turning--and overconfidence is deadly.
7) There's no minor league for trading: once you place your order, you're up against the pros, who have a lot of tools at their disposal.
I've learned many things from traders, but this perhaps is most important: The most successful traders and trading organizations I've had the pleasure of getting to know are constantly adapting to changing market conditions. They don't rely on a single trading model; they are always modeling. They do not scalp the midday hours the same as they approach the early morning. They know the difference between a market with active institutional participation and one dominated by locals--and trade accordingly.
People are comfortable with the known, and that keeps them static. It is so easy to lose money in the markets, because markets are dynamic.