Why Most Traders Lose Money Fast (Hint: It’s 100% Avoidable)

active trading strategies get absolutely killed on risk. Specifically, the sortino or sharp ratios. So, let's talk about what those are and why I'm so skeptical that anybody can trade actively trade anything. Literally, it doesn't matter if it's gold, silver, you know, soybeans, corn, uh cryptocurrency. If you're actively trading anything, stocks, bonds, you're probably losing. But let's talk about the sharp ratio and sort ratios. So the sharp ratio and the sortino ratio measure risk because when you're trading anything, you're trying to get a risk adjusted return. So if I go to somebody and say, "Hey, in the last three years, I've made 500% gain on my Bitcoin." They could retort, "Yeah, but I bought a lottery ticket and I could have made a billion dollars for $2." One second. And of course that is true. They could have made a billion dollars with a $2 lottery ticket, but the reason they're not going to is because the sharp ratio or the sortino ratio is awful. That means the likelihood, the amount of downside risk or the total volatility, the likelihood you're winning versus losing on a lottery ticket is abysmal. Which means even if you have a millionx possible return, the probability that you're going to win is 1 in 250 million, which is basically zero. So you're just not going to win. which is why lottery tickets are such a waste of time uh and such a horrible thing for people to buy. Um okay, so knowing that, what is the sharp ratio? The sharp ratio measures how volatile something is. And you need to know how volatile something is because if you're investing in something that is volatile, then the that volatility is going to affect your ability to make money on it. So if you're actively trading something and it has very high volatility, the probab probability that you're going to properly time the market by buying when it's low, selling when it's high, and all that is low. It's much lower if it's a high volatility asset. So something that has a good sharp ratio means the amount of ups the amount of reward as compared to the risk is good. It's in your favor. Something with a bad sharp ratio means that the probability that that volatility is going to kill you is much higher which tends to make it a bad investment. Uh Bitcoin has the best sharp ratio and sortino ratio of basically any asset. Meaning on a risk adjusted basis the risk versus the reward is much more favorable to you with Bitcoin than virtually any other asset. Okay. So let's talk about what is the sortino ratio. Well, the sharp ratio measures how volatile something is up and down. Now, you might be thinking, why would anybody care about volatility to the upside? Because everybody wants assets to go up in value after they own them. But that's not true because some people short assets, meaning they're betting that the asset's going to go down. So, the sharp ratio measures the volatility up and down. The sortino ratio measures just the volatility down. Meaning you don't get penalized for volatility that is up to your, you know, to your favor. So anybody that is investing in Bitcoin with the hope that it's going to go up is it's better to use the Sortino ratio rather than the sharp ratio. Now the truth is you're not going to use any of these ratios because you have to have a bunch of technical dashboards and expensive software and wonky stuff to use any of these things. But it's helpful to understand the concept of what these things are even if you're not actually going to use them in day in day-to-day life. Okay. So the sortino ratio only measures the downside risk. So if you're investing in Bitcoin with the hope that it goes up, the sort ratio is a more appropriate measure. Now again, you're not going to find these things. They're esoteric down in the weeds of investing. But I want to talk about those because when people are actively trading, the risk is what kills them. Nobody would argue that someone who's actively trading doesn't have the potential to make a lot of money. Just like nobody who buys a lottery ticket, nobody's going to say it's impossible that you're going to win. It's not impossible that you're going to win. It's just extremely unlikely that you're going to win. Uh same same with active trading or day trading or anything like that. It's not impossible that you're going to make money. It's just highly unlikely that you're going to make money. So, I did a video a little while back about why I'm so skeptical about active trading strategies, and I used the acronym hardly, H A R D L Y, with an F, as in it hardly ever works, and you get an F uh if you're actively trading. So, I wanted to compare risk specifically to those things. So, H, you can go back and watch the video, but H stands for hurdle rate. Obviously, you need to be comparing, you know, at least to the S&P 500 or gold. But if you're trying to beat, in my world, if you're trying to beat something, you have to beat Bitcoin itself. It makes no sense to brag about returns that are below Bitcoin because you could have just bought Bitcoin. So, H is for hurdle rate. And again, most things don't even perform as well as Bitcoin. So, there's no point in even doing them. If your investment strategy does not even perform as good as Bitcoin, what are you even doing? So, H is for hardly. A is for all portfolios. Again, people usually lull themselves into uh believing they're performing better than they are because they only look at the returns of their most recent portfolio. And all the portfolios from before that, they say, "Yeah, but the the bad outcomes of that portfolio was because I didn't follow my own rules or I didn't follow my gut instinct or I didn't know what I was doing yet or hadn't learned about some new Fibonacci retracement, you know, whatever." And so then they always say they always discount the bad performance of uh former portfolios. But you got to take those into account because there's no guarantee the current portfolio you're trading that you feel good about is not going to turn into one of those past performers where you say, "Oh, well that didn't work out. I did lose a bunch of money, but that's because I didn't understand X." And then X is your new trading thing that makes you feel like you're always going to win. So HA A is for any and all portfolios. And again, when you count any and all portfolios in instead of just your most recent portfolio, you realize your risk goes through the roof, the H of hardly hurdle rate. If you're not counting Bitcoin as your hurdle rate, again, you realize your performance sucks against the world's number one performing asset, which is Bitcoin. So, HR, R stands for uh recession. Again, the problem is not that your strategy can't work in an in a world with no recessions. Virtually all strategies work in a world without recessions. The problem is when a recession comes, your strategy gets killed. So, it's very easy to believe you're performing better than you actually are because the risk that is reflected by the sharp ratio or the sortino ratio shows up most aggressively in a recession. And unless you've been trading with the exact ta same strategy from prior to 2007. So it was working before the great recession, it was working during the great recession, and it's worked after the Great Recession, then your strategy has not been battle tested. One second. And a strategy that has not been battle tested can look like it's working a lot better than it actually is because the massive risk inherent in that strategy is being shielded by the fact that a major recession hasn't hit while you've been executing that strategy. So H is or sorry uh R is for recession. Uh D is for diversification. Once again, the if if you even acknowledge that the risk is high in your portfolio, it means you have a relatively small percentage of your assets in it. And this is typically what I find when people are actively trading something. I find out that it's like 1% of their assets or 5% of their assets or 10% of their assets. They're trading a pretty small percentage of their total net worth or their total assets, which is an acknowledgement that their strategy is too risky to employ for a larger percentage of their net worth as opposed to somebody like me who's got literally 100% of my liquid assets in Bitcoin because again, the sharp and sortino ratios for Bitcoin are so favorable that I can feel good about having 100% Bitcoin exposure, which I would never feel good about of an individual stock or bond or commodity or anything like that. Uh so HR D is for diversification. If if your strategy is so risky that it requires diversification, that indicates that is a high-risisk strategy. Uh L H A R D L What did L stand for? Um it's been a couple weeks since I did this video. Um uh I can't remember. Maybe it was loss, like risk of catastrophic loss and Y was like years. can you hold on to it for years? And f are you killing getting killed with fees? Um, all of those things. I'm forgetting what some of those, you know, the acronym, my own acronym I came up with, what it stands for because again, I'm just do this for the love of it. I don't uh I'm not a full-time uh producer of any sort of content. But regardless, when you factor in those elements, you just realize the risk is way higher than most people acknowledge. So, if there was a way, I do not know of a way to find out the sharp ratio or the sort ratio of an individual, you know, individual who's actively trading something because typically they're selling and buying. And I'm not aware of any trading software that actually tracks that for you. But if it if there was software that tracked it for you, you would find out that your sharp ratio and your STO ratio are absolutely abysmal. And by abysmal, it means you're taking on vastly more risk for your active trading strategy than you think you're taking on. And that's going to show up in a recession or when you finally make a really bad big bet and wipes out half or 3/4 of your portfolio. Um, but the the the major risk is a major recession, which again, almost nobody's active trading strategies have actually been battle tested by a recession. So if you're actively trading anything, the right way to measure that is the sharp ratio and the sortino ratio. I'm not even sure if you can find that out for your individual portfolio. Other than I can assure you it's probably absolutely abysmal. Meaning if you could if some sort of trading software would track your sharp ratio or your shortino ratio, you would find out that the risk of your portfolio and the risk of your active trading strategy is catastrophically off the charts compared to holding Bitcoin or just buying and holding whatever you know diversified group of S&P 500 or gold or whatever. Um so anyway, keep that in mind if you're actively trading anything. I'm skeptical. I don't think it works. Um, I don't think the average person can actively trade anything without an abysmal sharp ratio and sortino ratio, which means again it may look like you're winning, but it's like somebody who goes to a slot machine and says, "Hey, I made 50% above my money." It's like, "Yeah, but the risk you had to take on to get 50% more than your money made your riskreward absolutely horrible." That doesn't mean you didn't get lucky or it doesn't mean you won't get lucky until a major recession. It's just that the probability that your strategy holds up when it's when you're taking on vastly more risk than you're anticipating is just not good. The odds are not in your favor. So risk is what kills active trading strategies. The risk is hidden. If it was not hidden, the right way to measure it would be the sharp ratio and the sortino ratio. And if you could find that out for your active trading strategy, it would tell you that the riskreward ratio on your active trading strategy is probably abysmal. And uh hope that helps because in my ideal world, everybody would buy and hold whatever it is they wanted to buy and hold. And the active trading strategies that work so badly for people, people would stop trying them because generally they just don't work. So wanted to share that. Have a good evening.