Causes of Failure in Markets

1) Failure is due to the end of luck: If the markets are random, then success and failure is a simple random process. Given the large numbers of participants in the markets, it is inevitable that some will appear to produce above average returns for above average lengths of time. Yet, at each time-point they would have the same chance of future success as everyone else.

2) Failure is due to the end of trading consistency/discipline: It is also possible that the market is remaining unchanged and profitable, but the trader is changing. Loss of self-discipline, inconsistency, burn-out can all lead to failure of a trader without a reduction in the potential profits from trading.

3) Failure is due to rigidity: If the markets contain slowly-varying non-stationary patterns, then above average returns are possible by those that synchronize with those patterns. Yet with increasing success would come increasing confidence. Increasing confidence would lead to increasing risk-taking (e.g., use of margin) and increasing rigidity. An eventual shift in the market's underlying patterns would lead to above average losses as the previously successful trader stubbornly adheres to previously successful methods.

4) Failure is due to excessive size: The market may contain consistently exploitable patterns of bounded size. As the successful trader compounds their assets (by trading or by soliciting other people's money) they would eventually exceed the profitable capacity of the pattern. They would appear to lose their edge and slip back into mediocrity.

5) Failure is due to the rise of imitators: As successful traders become more visible, they become the subjects of imitators. This failure mechanism is exacerbated if the trader operates within an organizational context (e.g. proprietary trading firm or professional investment/trading firm). Peers and coworkers will inevitably learn the successful trader's techniques and imitate them. Personal ego also aids to the rise of imitators as the pride of the successful leads them to grant interviews and pontificate on their success.