Mass vs. Class

Traders Trade Secrets

Mass vs. Class

Trading — even just dabbling with your own personal account — needs to be viewed as a business.

If you think about it, the basic definition of the word “business” means to take some existing “capital” and invest it in some type of operation that may generate revenue that at some point exceeds the investment. The key word being “may”, as every business — including trading — is subject to risk.  And that risk may possibly equal or even exceed the capital investment.

So, you’ve decided to go into the “trading” business. One of the first “business decisions” everyone needs to face is the questions of “mass” vs. “class”.

A Mass-oriented business requires a high volume of transactions.  That is usually lots of sales, or customers.

A Class-oriented business relies on a high-price point and typically requires a small volume of sales, or customers.

(You can see we are really talking about Volume vs. Quality, but “mass” and “class” rhyme, so these terms became popular.)

What is most important for you to keep in mind — as a trader — is that a mass approach usually operates at very low profit margins. While a class approach absolutely requires higher profit margins.

Toyota is a mass-oriented company.  Bentley uses the class formula. Toyota sells millions of cars every year, at a profit of just a few hundred dollars or so per car.  Bentley sells thousands of cars annually, but they pocket over $10,000 per vehicle.

And, of course, the “mass-class” dynamic generally defines a range, with various blending of the two forces.

In trading, we can look at “mass” as the number of trades — and  as the amount of money invested (either as a portfolio or average position size).

“Class” would be the accuracy — often called the “win rate” or “winning trade rate” and/or the “average” gain per trade.

Much of the professional trading world has moved to the “mass” approach.  And the reasons for this have everything to do with what we’ve been covering in this Traders’ Trade Secrets series.

You see, as technology and mathematics came to dominate professional trading, the “mass” approach became more essential.  As we’ve covered earlier, scientific calculations become more accurate, more stable, more predictable with larger pools of data.  So a system that identifies dozens of high-probability trades per day tends to be more predictable.

Of course, the mass/class dynamic comes into play, and these higher volume systems tend to identify trades that have lower accuracy and lower average gains.

Now, a pro trader can be very successful with a win rate of just over 50% (52-54% is typical) and a small gain per trade (less than 1%) because the professional is pumping a lot of money through the system — dozens of trades and large positions.

So, if the pro is trading $10 million, winning 52% at an average gain of +0.5%, he grosses $26K per day, which comes out to $6.5 million or 6.5% per year — with very little risk!  Because finding moves of a half percent is not that hard.

We hope you begin to see that the professional world — and the scientific trading world — requires a huge investment in both time (# of trades) and investment capital.  Lots of trades and lots of money in play every day.  Which is why, historically, the stock market has always been the playground for the wealthy.

Here is where you — as an individual — need to make some informed choices.

Yes, you want to trade scientifically, using quant-based systems.  But you most likely do not have the time, the appetite for too many trades, and trading account size to accommodate many (if not most) of these systems.

Because you will remember the previous article, and you will not ever, never, no-way, no-how, ever “cherry pick” one of these systems again.

So, how can you proceed? Just follow a few simple rules…

  • Look for strategies that emphasize “class” not “mass”. High accuracy rates make the strategy more appropriate to the individual trader.
  • Take no-risk trials on such systems.  Trade on paper for a period that is long enough to validate the accuracy of your chosen systems.  Even if you need to pay for the privilege

Again, the main point of this article is to cure you of the all-too-typical “addiction to action”.  Making lots of trades, every week or every day is the #1 reason individuals fail at trading.

Be a “steady trader”. Be a “classy trader”.  Not an action junkie.

the Editors