Brokers for Quant Trading

The variance in trading performance was considerable. A range of
871,000 fSEK was obtained, with a maximum debt of –6,500 fSEK
as the worst result, to a maximum account of 864,500 fSEK as the
best. The mean outcome for the 52 participants was 79,616 fSEK
(SD = 170,029 fSEK) and the median = 14,025 fSEK. Ten
participants (19.2 %) went bankrupt, that is, lost all their fictitious
capital, another 6 participants (11.5 %) lost money but not all of it,
and the remaining 36 participants (69.2 %) were able to gain
money by trading.
Comparing the treatment groups
For the two treatment groups (receiving a lecture), the number of
bankrupt/surviving and losing/winning traders were compared by
Chi-square test, resulting in non-significant differences
(Chi2 = 2.42, p = .12; Yates corr. = 0.68, p = .41, and
Chi2 = 1.01, p = .31; Yates corr. = 0.39, p = .53, respectively).
The group means (Mgroup1 = 97,658 fSEK, Mgroup2 = 24,677 fSEK) did
not either differ significantly (t = 1.37, p = .18). Thus, there was
no significant effect related to the two lecturers and the two
groups receiving a lecture. Thus, they were considered to be
equivalent and therefore collapsed into one group when compared
to the control group in the following computations.
Position size of bankrupt, losing, and winning traders
The participants were not asked about what kind of position-size
strategies they used. Even without knowing if they used any
strategies at all, some conclusions can be drawn by looking at their
series of position sizes. There are several different ways the
traders have taken their positions. Some traders used a constant
fSEK-value position size, regardless of current total capital, while
some others used a constant percentage of current total capital.
Further, there seem to be traders varying the percentage of their
position size, for example, some of them were increasing their
position size after a losing trade, while others were doing the
opposite, that is, increasing the size of their position after a series
of winning trades.
How much of available capital that was put at risk in one separate
trade ranged from minimum allowed position size of 0.5% of
available capital to the maximum possible size of 100%. At level 1,
representing a trading system with expected value of 0.45 (i.e., a
gain of 0.45 fSEK per 1 fSEK put at risk), position sizes of 20% or
more were sometimes taken. This was done, even though such a
big position could be the last position taken, if a -5 to 1 losing trade
came up.
The bankrupt traders were apparently taking higher risks. They
were risking 22.9% on an average trade at level 1, while the
surviving traders were risking 6.6%. This difference was significant
(t = 19.3, p < .0001) indicating that the larger the position size,
the greater the risk of going bankrupt. When calculating differences
between the losing and winning traders, it was found that the
former took positions of 15.0% on the average compared to 6.0%
for the latter (t = 16.7, p < .0001).
The tendency described above was similar at level 2 (expected
value of 0.91). Bankrupt traders were risking 23.7% while surviving
traders were risking 3.7% (t = 15.6, p < .0001). Losing and
winning traders were risking 6.5% and 3.8% respectively (t = 4.1,
p < .0001). Accordingly, Hypothesis (1) and Hypothesis (2) were
Position size in the treatment and control groups
Receiving a lecture had an effect on the treatment group to take
smaller position sizes than the control group at both levels,
supporting Hypothesis (3). Thus, position sizes for the treatment
group were 5.5% at level 1 and 3.6% at level 2. For the control
group, the position sizes at level 1 and level 2 were 12.0% and
5.3%, respectively. The differences between the two groups were
significant at both level 1 (t = 14.8, p < .0001) and level 2 (t = 3.0,
p < .001).
All in all, the traders who received a lecture took smaller positions,
than those in the control group, and the traders that took the
smaller positions did not only survive in the simulated market, but
were also able to gain money over the long run. The average
position sizes of the different groups of traders are presented in
Table 5.
Table 5. Average position size over groups of traders
Level 1 Level 2
Group of Traders M SD M SD
Winning 6.0%. 7.8% 3.8% 5.2%
Losing 15.0% 14.0% 6.5% 15.1%
Surviving 6.6% 8.0% 3.7% 5.1%
Bankrupt 22.9% 18.5% 23.7% 29.9%
Treatment 5.5% 7.5% 3.6% 6.9%
Control 12.0% 12.3% 5.3% 9.8%
The only variable available for manipulated by the participants
were the size of their position. None of the traders did risk exactly
the same amount, trade by trade, at exactly the same time as
someone else. As a consequence, except for some of the traders
going bankrupt, there were not two traders getting the same
amount of capital. Accordingly, how big or small capital a trader
would get in the end was primarily determined by the size of the
trader’s position.
Profits and losses in the treatment and control groups
The participants in the treatment group lost all their money to a
lesser extent (2 out of 32 = 6.3%) than those in the control group
(8 out of 20 = 40.0%) and thereby confirming the fourth
hypothesis (Chi2 = 9.03, p < .01, Yates corr. = 6.98, p .05; Yates corr. = 1.85, p > .05).
Neither did Hypothesis (5) receive statistical support (t = -1.11, p
> .05) when comparing mean amount of capital gained by trading.
The treatment group (M = 58,888 fSEK, SD = 152,480) did not
gain more as a group than the control group (M = 112,782 fSEK,
SD = 194,382).
Effects of gender and prior knowledge of trading
The treatment and control groups did not differ significantly in the
distribution of gender (Chi2 = 3.40, p > .05; Yates corr. = 2.38,
p > .05) and prior experience H(2, N = 52) = .43, p > .05.
There was a main effect of Gender, F(1, 46) = 7.17, p < .05, Prior
knowledge of trading/investing in the stock markets,
F(2, 46) = 8.26, p < .001, and there was an interaction effect of
Gender and Prior knowledge, F(2, 46) = 6.47, p < .005.
Tukey HSD post hoc-test confirmed Hypothesis (7) (p < .0001)
that female traders gained more capital (M = 249,938 fSEK) than
men did (M = 77,372 fSEK). Having prior knowledge of
trading/investing was of an advantage, if one was active trader
(p .05;
Yates corr. = .51, p > .05). There was neither any difference
between the three conditions of prior knowledge of
trading/investing H(2, N = 52) = 1.22, p >.05.
One purpose of this study was to find evidence for the importance
of position sizing. The results showed that in order to survive
trading in a simulated stock market, using a trading system with
expected value of < 1.0, one should take positions in sizes of
approximately 3.7% – 6.6% as the surviving traders, rather than
22.9% – 23.7% as the bankrupt traders. Further, to be able to
increase one’s account over the long run and actually make money
by trading the simulated market, one should not risk much more
than 6% as the winning traders did on an average. Accordingly,
deciding how big one’s position of shares should be was of crucial
importance. If the participating traders would lose all their money,
get into debt and not be able to trade anymore, or if they would
gain profits of up to 871,000 fSEK, as the best performing trader
did (an increase of 8,500%), was primarily determined by their
position-sizing strategies, since position size was the only variable
they could affect.
Of course, the results were also influenced by chance, since the
outcome of a trade, to win or lose, was determined by randomly
pulling a marble out of a bag. However, all the participants were
trading the same positive-expectancy trading systems. They should
all be able to gain money over the long run, but not everyone did.
The traders participating in the same sessions, did all get the same
trades, winners as well as losers, and no traders, other than some
of those going bankrupt, did get the same results.
Even though this study focused on allocation made by individuals
trading one type of commodities, these findings are in line with
those of Brinson, Singer, and Beebower (1991) where the main
determinant of the differential return of the pension funds was
asset allocation.
Further, was it possible to teach traders to implement less risky
and more profitable position-sizing strategies, so they could survive
in the markets and gain money? Yes, as the results reveal, the
fourth hypothesis was confirmed. The participants that received a
lecture in position-sizing, risk management, and psychological
biases did not lose all of their capital to the same extent as the
control group. All in all, it gave a trader in the treatment group a
tenfold bigger chance of surviving in the stock markets. If the
traders can continue to trade over the long run, there is a greater
chance of getting opportunities of great returns, than if they were
standing by the sidelines. There was a tendency of more traders
being able to trade profitable in the treatment group. Although this
difference was not statistically significant, it is encouraging for
further explorations.
However, the treatment group was not able to produce larger
profits than the control group, when comparing the two groups’
mean results. This outcome may be explained by the fact that the
lecture mainly focused on how to cut losses short and to prioritize
short-term survival first, in order to get long-term gains. Maybe,
the first part of Larry Hite’s basic rules about winning in trading
was not emphasized enough, leading the treatment group to take
too small positions? ”(1) If You don’t bet, you can’t win. (2) If you
lose all your chips, you can’t bet.” (Schwager, 1993, p. 189). Again,
an explanation why the control group gained more as a group is
probably position size. If you bet big you will lose big when you
lose. Evidently, if you bet big you will win big when the draw goes
your way.
For future studies and/or education, more emphasis should be
directed toward maximizing gains, “letting the profits run”, for
example, by hands-on training in position-sizing strategies.
Gender was a contributing factor in the results obtained by the
participants. Women did gain more money than men, but they did
not survive significantly better than men when trading a simulated
market. If the findings of Powell and Ansic (1997) that women are
risk averse when deciding in financial matters, was the reason for
this, remains to be investigated.
According to Myagkov and Plott (1997), risk seeking seems to
diminish with experience. This view can be supported by the main
effect of prior knowledge of trading/investing attained in this study.
The active traders performed better than the traders with little or
no experience. The study was carried out in a laboratory setting,
with most participants having little or no prior experience of
trading stocks. This can make generalization difficult and further
research is needed in more realistic settings.
Further, the willingness to take risks is highly dependent of what is
at stake. The only real money the participants could lose was the
remuneration. A more realistic risk-taking behavior would probably
be expressed if the participants were risking their own money
while trading. However, this would, most probably, rise some
ethical as well as practical difficulties.
In order to minimize the risk of anyone tampering with the data
forms, future studies are encouraged to gather the data
electronically, by using computer-generated versions of data forms.
Finally, being able to decrease the risk for a trader of getting ruined
to a tenth, even if demonstrated only in a laboratory setting, is
highly inspiring. With such small means as a three-hour lecture,
only by verbal information on certain, well-known relationships,
there can be more people being able to gain money by trading in
the stock markets, as long as the behavior shown can be
generalized “in vivo”. Further exploration of the importance of
position-sizing is essential. Trading is not an easy game and most of
us need all the support we can get to beat “our enemies”, in order
to make better and more profitable decisions.
The speculator’s chief enemies are always boring from
within. It is inseparable from human nature to hope and
to fear. In speculation when the market goes against
you hope that every day will be the last day – and you
loose more than you should had you not listened to
hope – to the same ally that is so potent a successbringer
to empire builders and pioneers, big and little.
And when the market goes your way you become
fearful that the next day will take away your profit, and
you get out – too soon. Fear keeps you from making as
much money as you ought to. . . . Instead of hoping he
(The successful trader) must fear; instead of fearing he
must hope. He must fear that his loss may develop into
a much bigger loss, and hope that his profit may
become a big profit. It is absolutely wrong to gamble in
stocks the way the average man does.” (Lefèvre,
1923/1993, p. 130)


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