Thread by @mikeharrisNY

🧵about selling trading strategies and software.

Some people ask a good question:

"Why do you sell software and strategies if they are making money?"

They usually imply there is something fishy.

Well, these people usually don't understand trading and risk management.

I recall recently someone asked @chanep this question during a webinar where he was talking about his ML software. His answer was good: Because I need to raise capital to trade.

So let's take this from start. There are three components: operation, capital and risk management.

Operation: I'm not raising OPM. I trade my own money. I don't like risking OPM. Retail traders cannot allocate all their money to trading. There are expenses they must cover every month.

The typical capital of retail trader ranges from maybe $50K to $1M. Not enough money.

Capital: Traders need to raise capital constantly because of constant withdrawals to cover living expenses and operational costs. If trading is full-time job, there is no other source of money. Selling IP can be a source.

The market for trading strategies and software is much smaller than many think and highly fragmented. There are wide variety of needs and objectives. There can be a stream of income but small. In addition, those who use strategies or software are tiny percentage of traders.

Risk management: On top of limited recourses, experienced traders take small risks. It's hard to become rich with $500K capital when risking 0.3% on each trade especially for position trading. There are not many opportunities in the markets generating many setups daily.

Therefore, the only way to increase dollar risk is by increasing capital and those who have something to sell do it because the impact is anyway small since the market is tiny. The proceeds finance future development and sustainability of the operation.

Unless someone wants to go into debt and leverage to finance trading but this is reckless and guarantees ruin if something goes wrong. Experienced traders understand risk and money management well and take small risks. This is also a problem.

So conception if someone has good strategy that makes 10% p.a. can become rich is false unless taking high leverage and this is what those who are skeptical don't realize. It's true though there are many bad agents in this space who promise high returns. But is true in all areas.

Those who promise high returns actually harm not only their customers but the other vendors who are honest and the whole genre gets a bad name. Some of those bad agents cannot calculate returns and position size but manage to fool people.

No, you cannot trade strategies with options because theta decay will kill your capital at the end even if the signals are good. Options is a "hope and dreams" adventure or sophisticated plays for hedgers. Covered calls can be profitable but require large portfolio.

All in all, there are many misconceptions about trading and how money is made. Operational mode, capital and risk management are determining factors. For retail that aren't raising money from public, there are limited options. One of them is to share ideas with others.