Realistic Stock Trading Expectations (Survivorship Bias)
- FinancialWisdom
- Mar 25, 2024
- 4 min read
Updated: Jan 10
Why Most Traders Chase Winners and Lose Money
Introduction
Survivorship bias is one of the most dangerous — and least understood — psychological traps new traders fall into.
Many traders enter the stock market after seeing extraordinary past winners: stocks that returned 500%, 1,000%, or even more. They imagine the wealth they could have made and assume similar opportunities are always available. But this line of thinking is fundamentally flawed.
The problem is simple: history hides far more failures than successes.
Why Survivorship Bias Is So Dangerous in Trading
Survivorship bias occurs when analysis focuses only on winners while ignoring the much larger group of losers that didn’t survive.
In trading, this leads to:
Overestimating how easy success is
Underestimating risk
Believing extreme returns are normal
Taking oversized positions
Ignoring the probability of ruin
This is one of the reasons why around 90% of traders fail, and why a very small minority of participants capture the majority of gains — a distribution similar to global wealth concentration.
To succeed, traders must adopt realistic expectations, not optimistic fantasies built on incomplete data.
The WWII Aircraft Example: The Classic Survivorship Bias Lesson
One of the most famous examples of survivorship bias comes from World War II.
The Allied military studied returning aircraft to determine where to add armor. Data showed that planes returning from missions had significant damage on their wings, tails, and fuselages. The initial instinct was to reinforce those areas.
However, mathematician Abraham Wald identified a critical flaw.
The analysis only considered planes that returned.
The planes that didn’t return — the ones shot down — were missing from the dataset. Wald concluded that the military should reinforce the areas that showed the least damage on surviving aircraft, because damage in those areas was likely fatal.
This insight saved countless lives.
The same logic applies directly to trading.
Survivorship Bias in the Stock Market
The Google Illusion
Google dominates search today with roughly 85% market share. Looking back, investing early in Google seems obvious.
But in the late 1990s, there were dozens of competing search engines. Most disappeared after the dot-com crash. Investors at the time had no reliable way to know which company would survive.
What we see today is the winner — not the graveyard of failed alternatives.
Looking backward creates a false sense of certainty.
Trading Competitions and the Illusion of Easy Returns
Survivorship bias is especially visible in trading competitions.
In the 2023 U.S. Investing Championship, I finished 32nd out of around 400 entrants with a 27% return and controlled risk. The winner returned over 800%.
What most observers see:
Massive returns
A handful of standout performers
What they don’t see:
Accounts that blew up
Excessive leverage
Traders who lost everything and disappeared
Only the survivors remain visible.
This distorts expectations and encourages reckless behavior from those trying to replicate headline results without understanding the risks involved.
Another great video on trading expectations and Psychology can be seen here:
How Survivorship Bias Destroys New Traders
The typical cycle looks like this:
Trader enters inspired by extreme past winners
Losses appear quickly (as they always do)
Ego and denial take over
Losers are held too long
Capital suffers severe damage
Trader becomes fearful and stops trading
Missed opportunities trigger FOMO
Poor re-entries cause further losses
Mental exhaustion sets in
Trader quits permanently
This entire cycle is avoidable with proper expectations and risk control.
Why Losses Are Not a Failure — They’re a Requirement
Losses are not an anomaly in trading — they are the cost of participation.
Professional traders expect losses. They plan for them. They limit them.
New traders, influenced by survivorship bias, believe losses mean something is broken — or worse, that they are broken.
The difference is not intelligence or skill — it’s expectation.
How to Protect Yourself from Survivorship Bias
1. Treat Failure Data as Equally Important
For every big winner, there are hundreds of failures.
Understanding what didn’t work is just as important as studying what did.
2. Always Use an Exit Strategy
Survivorship bias convinces traders that every position could be “the next Google.”
Reality says most won’t be.
A simple exit rule — even a single indicator — can protect you from catastrophic losses.
3. The 20-Week Moving Average: A Simple Survival Tool
One of the simplest long-term defense mechanisms is the 20-week moving average.
Repeated examples show how exiting when price closes below this level would have prevented devastating losses:
Canopy Growth (WEED): −99% after losing the 20-week MA
Tattooed Chef: collapsed from $19 to near zero
Planet 13 Holdings: −90%+ decline
Personalis: from $30 to $1.60
Berkeley Lights: −99% before delisting
In many cases, prominent influencers remained optimistic as prices collapsed.
Small investors, with concentrated positions and limited capital, paid the price.
Influencers, Hope, and Concentration Risk
Influential voices often remain confident during declines — sometimes encouraging investors to “buy more.”
But small accounts cannot absorb the same drawdowns as large funds.
Survivorship bias causes traders to believe:
“This could be the next Tesla.”
More often, it isn’t.
Without exits, hope becomes a strategy — and hope is not a risk management plan.
Indicators Are Tools — Psychology Is the Foundation
The 20-week moving average is just one tool. Others include:
Trend structure
Market regime filters
The specific tool matters less than having one.
Even more important is building a mindset that:
Accepts uncertainty
Respects probability
Avoids emotional attachment to stocks
Focuses on survival first
Final Thoughts: Be the Plane That Returns to Base
Survivorship bias makes trading look easier than it is.
Success stories dominate headlines, while failures vanish quietly.
If you enter the market with realistic expectations, disciplined exits, and respect for risk, you dramatically improve your odds of long-term survival.
Trading is not about catching every winner.
It’s about staying in the game long enough for skill, discipline, and probability to work in your favor.
With the right mindset and structure, you can avoid survivorship bias — and be the plane that consistently returns to base.
Related Reading
Inside the Financial Wisdom Weekly Consolidation Breakout Framework
Risk Management in Trading: The Foundation of Long-Term Profitability
Published by FinancialWisdomTV.com Rules-Based Trading | Quality & Momentum | Probability-Driven Execution
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