Why is it difficult to make money in the markets? There are many reasons why it is difficult to make consistent profits by trading. Some people trade without an edge, some do not treat it as a business and some are simply just unlucky. Regardless of these points, the environment in which trading occurs is highly random. It is a treacherous environment to expose your money to, like trying to dive into the ocean without knowing how deep it is or what lies beneath.

Why are markets so random? There are a multitude of participants in all different shapes and sizes making different decisions at different times. High Frequency Trading (HFT’s) and algorithms (algos) add noise to prices. Markets are being manipulated by insider trading. Fear and greed influence every person’s decisions when trading or investing. Markets themselves have their own “inertia” and respond differently to different situations.

Market randomness poses a unique problem for our brains. Look at the building below – do you see a face?

Our brains are looking for patterns. The architect of this building probably had no intention of making this wall look wide-eyed and surprised, yet our brain perceives this pareidolia effect as a bemused face. Due to the high randomness of market structure, certain random shapes can be viewed as tradeable patterns – and this is a problem. This is a consequence of trading financial instruments that cannot be avoided. We have to live with the fact that the markets can sometimes misdirect us because it may be difficult to differentiate between profitable patterns and random noise. Because of this, it is practically impossible to have zero losses. Proper business and risk management is crucial to keeping losses to a minimum.