1. Making money consistently trading the markets – What is the key to
Having been for over two decades trading the markets, I am often asked
how does one make money consistently when markets at large are pretty
Well as a starter, let us set the premises about market efficiency right.
1. Markets are NOT efficient, and this is not a controversial statement.
Eugene Fama, the main proponent of the Efficient Markets Hypothesis, has
written extensively on inefficiencies.
What is controversial is the extent of the inefficiency. Upon close scrutiny,
a great deal of inefficiencies really aren’t: They either are not robust to
empirical tests, or can be explained away with a better factor model.
Moreover, many inefficiencies are not exploitable due to transaction costs.
2. 2. If markets were efficient, there would be no excess returns, no one
would trade, and there would be no market. The existence of participants
proves market inefficiency, let alone the existence of consistently
The size of this inefficiency, as well as its presence in the aggregate, is
always subject of much debate.
3. After all is said and done, many traders are not evaluated annually on
the outcome of a single bet, but daily or weekly. Correcting for return
it is possible to test their performance based not on ten coin tosses, but
literally thousands or even tens of thousands. This makes tests on
performance much more informative.
3. Granted it is probably true that there are very few free lunches in the
market, but that does not mean price always equals value. For the long-
term investor this can mean opportunities to buy value at lower prices.
So bottom line folks… markets are not efficient. They are efficient only if all
information are available to everyone and everyone perceive the
information in the same way.
But that is not true in real life situation. A you know, one trader can sell
after seeing the employment number while another buys.
We traders make money consistently because human behave in a
consistently irrational way. Think about how often you opt to take the
same route, train, or even same cloths to work.
We are creatures of habit. And that’s what make market to some extent
4. So what are some of the ways to consistently make money?
Superior technology, trading speed, and analysis. We have consistently
made a great deal of money because we are aware of many
inefficiencies’ in the market of which others are not aware and can thus
profit from. Moreover, the more strategies being traded the more
opportunity for overlapping arbitrage opportunities and the better
execution strategies get… This has proven remarkably consistent.
Superior information/access to management. This is somewhat self-
explanatory, but we often get faster information and better access which
Ability to provide liquidity or trading where other institutions cannot:
Basically by engaging in block trading where others couldn’t and through
shorts because the vast majority of money in mutual funds was long-only
and thus they could find over-pricing in the markets.
5. Bottom Line:
The only way that you can make money consistently from blackjack or
craps is to own the casino. The traders that work in an investment bank
They are *dealers* and the bank is the casino. Also if you have a nice
casino, you can make money from the shows, restaurants, tour guides.
The difference between the stock market and a casino is that a casino is
zero or negative sum, whereas the markets and banks are positive sum. If
you go to a blackjack table and you have no idea what you are doing and
you play at random, you will on the average lose.
If you pick stocks at random, then on the average you will win because you
are creating wealth from the markets. This means that you end up with
massive jobs for the dealers at the tables.
6. One thing that for example you will find from professional traders that
work at big banks is that most them believe that markets are
unpredictable, and they will almost never even try.
Asking a trader what he thinks about the direction of the market is in
most cases like asking a blackjack dealer what the next card in the deck
will be. He or she doesn’t know and doesn’t really care.
It is a fact that the percentage of traders that do make money on a
consistent basis over the long term is extremely small. Those that are
successful combine discipline and money management skills to make a
No great intelligence is required, all a trader needs is the ability to
recognize a pattern and manage risk. Greed and loss aversion are what
complicate the issue.
The mechanics of a trade are usually as follows: The price of an asset
moves from X to Y to Z as it has in various times in the past.
7. A trader recognizing the pattern knows that if he buys the asset at Z, there
is a certain probability that price will move to A before it moves to B. The
idea is to take profits at A and cut losses short at B.
A profit maximizing trader in possession of an ‘unfair coin’ will proceed to
flip it as many times as possible. Having the discipline to follow setups and
manage money consistently (as in the same exact way every time) is what
separates the men from the boys.
Most people hold onto losing trades too long and sell winners too soon. It
only takes a couple bad trades to blow up an account.
The scenario I have just described applies to most individual speculators
rather than sophisticated institutional investors, but the idea is largely the
same. Institutions just spend a lot more time and money developing
strategies and forecasting the economy to exploit these market anomalies
and manage risk. The rewards for those that are successful are enormous.
8. Now that you know the basics of consistently making money in any
market, go apply those skills and never look back.
Your thoughts as always are greatly appreciated.
Thank you , Follow Ziad Abdelnour@