Luck Versus Forecast Ability: Determinants of Trader Performance in Futures Markets

Abstract

Statistical techniques are used to demonstrate that the fortunes of individual futures traders are determined by luck, not forecast ability. Even though a large number of traders appear to exhibit significantly superior forecast ability, the investigation strongly supports three conclusions: there are fewer participants with significantly superior skill than expected if participants trade randomly, there are more traders exhibiting no skill than expected if participants trade randomly, and forecast ability is not correlated over time--superior forecasters in the early period are only average forecasters in the later period. Therefore it is luck that determines trader performance. Copyright 1991 by University of Chicago Press.