Friday, July 28, 2006

Enticement, Deception, and the Daily American Idol of Trading

I opened a trading magazine last night, and here was the copy to an advertisement encouraging retail traders to enter the foreign exchange markets:

"Just because you've got a nice, solid, grown-up stock portfolio doesn't mean you can't have any fun. Why not add currency trading into the mix...It's fast, exciting, open 24 hours a day--and there are no commissions...But best of all, it's easy to get started. All you need is $250 to open an account."

Now reread the above copy and just substitute the words "casino gambling" for "currency trading". You get the picture.

What is even sadder is that, after traders have run through their several hundred dollar trading stake (no doubt aided by the 3-pip wide spreads that accompany "free" trading), many of them contact me as a trading psychologist. They (incredibly) harbor hopes that they will parlay hundreds of dollars into many thousands and they're seeing those dreams dashed before their eyes.

So I end up playing Simon Fuller and telling them that they don't actually have a good voice and can't possibly be America's next Idol.

Deception abounds. How about this line of copy from a commercial website ostensibly devoted to the teaching of traders:

"Due in part to its size, Forex is less volatile than other markets. Lower volatility equals lower risk. For example, the S&P 500 Index trading range is between 4% and 5% daily, while the daily volatility range in the Euro is around 1%."

WTF?? Forex is *less* volatile than the S&P 500 Index?? Even ignoring the fact that currency traders typically trade with more leverage than equity traders, since when has the S&P 500 Index sported trading ranges between 4 and 5% daily?? That would be the equivalent of 50-60 ES points every single day!!

In this case, I actually wrote to the firm and reported research that showed that Forex was *not* less volatile than equities (actually, it has a more leptokurtic distribution of price changes, with lots of small ones and a smaller number of phenomenally large ones) and was not a superior trending vehicle (the conditional probability of the next period following the direction of the previous one was no better than 50/50 and actually somewhat worse).

I received no reply to my research. To this day, the advertorial copy hasn't been changed.

So there it is. One company markets currency trading as a casino, the other as a safe haven with non-volatile trending.

Either way, I get the emails describing dashed hopes and expectations.


Robert said...

Sadly most of us are "programmed" only to learn from our own mistakes. Even so, that so many of us have such a high regard of our own abilities relative to others without any supporting evidence remains bewildering and extra-ordinary to me.

Great blog, book, yada yada, btw.


Brett Steenbarger, Ph.D. said...

Hi Robert,

Thanks for the note. I completely agree, and I think the American Idol analogy is not off the mark. A number of people try out and are absolutely devastated when they are not selected. Many have no stage presence to speak of, modest if any singing skills, and are nothing to look at to boot. But they convince themselves that they have a chance. And that's really the problem: they view life as a lottery, not as a meritocracy. As long as that is the case, there will be commercial interests willing to cater to misplaced hopes and dreams.


yinTrader said...

Sadly, the public want to believe there is a Holy Grail in trading when unconscionable presenters make fantastic claims in their ads.

Such statement as: 1000% returns on your capital in a few days, is common. There is no definition of what capital is - is it margin or equity base? Or is it on a one time basis, as the risk of reward ratio on trades only gives consistent profits in the long run.

The world's best traders are quite happy with 20% or more on equity base p.a.

Only through education and trading will the gullible be able to recognize the myths, hopefully.

Trader 13 said...

Hi Brett

Good one. I like the analogy with American Idol. Can I use it?

The sad fact is the crowd wants to hear fantasy rather than reality.

Brett Steenbarger, Ph.D. said...

Thanks for your note. I think you're right: much of the public *wants* to believe that quick riches are possible. In that sense, the "gurus" are selling hope as their main product.


Brett Steenbarger, Ph.D. said...

Hi Trader 13,

You're certainly welcome to the analogy; thanks for your note. I do think there's an element at work that attributes trading outcomes to luck, not skill. People would never think of jumping into the ring with a professional boxer for a shot at a championship, but they don't hesitate to risk their money against financial professionals.


John Wheatcroft said...

Your last comment is most telling. I follow Trader-X's methods and have enjoyed great successes. I was reading an interview with him on Trader Mike's log and I was surprised to read that he receives a lot of "hate mail" because of his 80% win rate. While this sounds high if you follow his methods you too can win at that rate. It is simple - don't pull the trigger until the target is in sight.

I too have been castigated because I have a "golden hand" but the fact is I have worked hard to find methods that work and that work more often than not.

And I believe that this is because there are a lot of losers out there and they lose because they don't know how to win.

People such as Trader X or John Carter (author of Mastering the Trade) can teach you enough set-ups in a short afternoon to make you instantly and consistantly profitable. But unless they have what you provide, Dr. Steenbarger, the courage of the conviction they will not be able to convert that information to enhance their lives.

So thank you for this blog and keep spreading the word.

Brett Steenbarger, Ph.D. said...

Thanks, John; you're absolutely correct. There are many excellent trading resources on the Web if you know where to look. I've highlighted some of them on the Trader Development link page on my personal site ( and will be updating that list shortly.