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Say you have a friend Bob that is bad at trading and loses money consistently. Can you take position opposite of Bob for example if he buys a stock you secretly short it and when he sells you cover your short. Would you turn that 90% losing money into 90% gains?

Also if this actually works then oops I guess I just gave away a free strategy.

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    Related: xkcd.com/2270
    – glibdud
    Sep 17, 2021 at 18:15
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    Yes. The opposite of what Bob is doing is investing for the long term :-)
    – jamesqf
    Sep 18, 2021 at 3:29
  • The big challenge is in finding a trading strategy that really loses money consistently (before transaction fees).
    – Flux
    Sep 18, 2021 at 4:25

2 Answers 2

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No -- to quote a related answer:

The opposite of a bad strategy is not necessarily a good strategy!

The heart of the problem is that the weighting of a portfolio affects returns arithmetically, while the success or failure of a strategy depends on geometric compounding.

Here is a simple example. Suppose Bob's strategy returns either +60% or -40% each month with equal probability. Bob is almost certain to ultimately lose his money, because on average, for every month when his wealth is multiplied by 1.6, there is a month when it's multiplied by 0.6, and 1.6x0.6 < 1.

The opposite of Bob's strategy is even worse, returning either -60% or +40%, leading to 0.4x1.4 < 1.

Now, here is a mind-blower:

Suppose Alice has a strategy that is exactly as bad as Bob's, but is uncorrelated. That is, Alice's strategy returns either +60% or -40% with equal probability, independent of Bob's return. Alice will lose all her money too. But suppose you invest half your money in Alice's strategy and half in Bob's, rebalancing monthly.

Then 25% of the time your return will be +60%, while 50% of the time it will be +10% and 25% of the time it will be -40%. So your wealth growth is determined by 1.6x1.1x1.1x0.6 > 1. The combination of Alice's strategy and Bob's strategy is profitable!

An implication is that buying only a subset of stocks in an index can be unwise, yet excluding those stocks from the index can also be unwise! This is the miracle of diversification: The whole is truly greater than the sum of its parts.

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  • Unfortunately, the ‘mind-blower’ will not work out for just any combination of two bad traders…
    – Aganju
    Sep 18, 2021 at 13:04
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There are a lot of reasons why day traders fail. One that can't be overcome by taking the opposite side of the trade is transaction costs (bid/ask slippage) and commission costs if you're still paying them. The more you trade and/or the more leverage you use, the greater the effect.

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  • Thats why you gotta use free brockerage and only trade big cap companies problemo sovled!
    – Lightsout
    Sep 17, 2021 at 22:28
  • And yet with free commissions, most traders still lose money. Go figure. Sep 17, 2021 at 23:08
  • Oh no I meant do the opposite of traders that use free brockerage and trade mega caps that means their trading strategy is the thing that is losing money.
    – Lightsout
    Sep 17, 2021 at 23:28
  • @Bob Baerker: Quite apart from bad trading decisions, a day trader faces the problem of the Gambler's Ruin. Statistically, in a game with even odds, a gambler with finite capital will eventually go broke playing against one with infinite capital. If they play long enough, they eventually have a run of bad luck long enough to wipe out their capital.
    – jamesqf
    Sep 18, 2021 at 3:35
  • @bakaloo - Hypothetical example: You're playing poker at a casino and the house takes $1 per player for every hand played. After one hand, every player is down $1 except for the winner of the hand. After 100 hands, each player is down $100 to the house. It's possible there are lots of small winners in one evening (skill or luck) but if you play 5 days a week, week after week, it's more likely that only the few with serious poker skills will be in the plus column. For the market, these losses are a given and that's before the myriad of reasons (bad decisions) why traders incur losing trades. Sep 18, 2021 at 12:10

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