Lessons › Why traders lose › Who's on the other side
World 11 · Why traders lose · lesson 9 · level 2
Who's on the other side
Every trade has another side, often a firm running fast computer programs, and every extra trade is another chance for it.
In one line
Every time you buy, someone sells to you. You never see who.
Explained simply
Every trade has two sides: when you buy, someone sells to you. In futures and options, bets on where prices go next, trading before costs is zero-sum: what one side gains, the other side gives up. After costs, both sides together lose. In India, in one year, trading firms and foreign funds made about $7 billion, mostly with computer programs, and individuals lost about the same. In Taiwan, individuals lost about $6.4 billion a year while every group of professionals came out ahead. Every extra trade is another chance for the other side.
Mistakes to avoid
- Assuming the other side of your trade is another beginner.
- Forgetting that after costs, both sides together lose.
- Treating every extra trade as another chance to win, not another chance for the other side.
- Judging a year without the market: the busiest traders earned 11.4% when the market earned 17.9%.
Check yourself
Before costs, futures and options trading is zero-sum. What does that mean?
What one side gains, the other side gives up. Every trade has two sides. Before costs, one side's gain is the other side's loss.
In India, in one year, who made about $7 billion from futures and options, before costs?
Trading firms and foreign funds. Trading firms and foreign funds made about $7 billion in that year, and individuals lost about the same, before costs.
Where did 96 to 97% of those firms' profit come from?
Computer programs that trade. 96% of the trading firms' profit and 97% of the foreign funds' came from computer programs, which are often faster than you.
After costs, what happens to both sides of futures and options trades, added together?
They lose, because both pay costs. Before costs the two sides cancel out. Costs come out of every trade, so together they end below zero.
The busiest traders earned 11.4% a year while the market earned 17.9%. How far behind the market were they?
6.5 points a year. 17.9 − 11.4 = 6.5 points a year behind. Making money is not the same as doing well, and every extra trade was another chance for the other side.
Goal of this lesson: Explain what zero-sum means and who often takes the other side of an individual's trade.