While discussing arbitrage and the no-arbitrage pricing model, we learned that trading financial securities does not create wealth.

While discussing arbitrage and the no-arbitrage pricing model, we learned that trading financial securities does not create wealth. Yet, we can observe that there are professional day traders as well as high frequency trading firms and actively managed investment funds. If trading on its own does not create wealth, how do these market participants earn a profit? Is it possible that some trading does create wealth?

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Expert Solution

Yes, Trading does possibly create wealth and it is evident from large investors who were traders before in their early life like Paul Tudor Jones or ray dalio.

They are depending upon technical analysisin order to analyse the trend of the market and they are trying to to study the price and volume patterns in order to determine the overall and descrepencies in the price and the expectation in which the prices going to go and they will be trying to take their position accordingly and make profits so there are not all traders who make profits but there are a small number of traders who do make profit and they are evident in the market because they are doing the technical analysis and they are trying to capitalise upon that.

Market is always a game of probabilities and if if there is a trader who is on the the positive side of the probability will be going to make money and if his estimation is going to get true then he is going to get successful in the market after application of the technical and the other behavioral tools.

jeff jeffy answered 2 years ago

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