Why do traders fail?

[Tradester123]

I have a project to complete and im a beginner to trading so i am not very familiar with it, i need to know detailed reasons to why traders fail

Help would be appreciated :smart:

 

[chaselancaster]

I have a project to complete and im a beginner to trading so i am not very familiar with it, i need to know detailed reasons to why traders fail

Help would be appreciated :smart:

1. Because trading psychology is counter intuitive to normal human psychology and most never get to grips with it / find a way of managing it
2. Because most are under funded so over leverage exposing themselves to potentially ruinous risk.
3. They think they need to be right to make money - and don't know actually it's all about having an edge.

I would say these are the 3 main broad reasons.

 

[Steve]

I have a project to complete and im a beginner to trading so i am not very familiar with it, i need to know detailed reasons to why traders fail

Help would be appreciated :smart:

Tell us more about the project please.

 

[Rhody Trader]

I have a project to complete and im a beginner to trading so i am not very familiar with it, i need to know detailed reasons to why traders fail

Look up the Disposition Effect in the Behavioral Finance literature as a very good starting point.

 

[yellowfloyd]

I have a project to complete and im a beginner to trading so i am not very familiar with it, i need to know detailed reasons to why traders fail

Help would be appreciated :smart:

Not enough research, trading for the sake of it. Refusing to take losses. Small profits, big losses are a few reasons that pop to mind.

 

[Jason Rogers]

I have a project to complete and im a beginner to trading so i am not very familiar with it, i need to know detailed reasons to why traders fail

Help would be appreciated :smart:

Hi Tradester,

Poor risk management is a major factor that prevents traders from being profitable. For example, the chart below shows the results of a data set of over 12 million real trades conducted by FXCM clients worldwide in 2009 and 2010. It shows the 15 most popular currency pairs that clients trade.

The blue bar shows the percentage of trades that ended with a profit for the client. Red shows the percentage of trades that ended in loss. For example, in EUR/USD, the most popular currency pair, FXCM clients in the sample were profitable on 59% of their trades, and lost on 41% of their trades.

So if traders tend to be right more than half the time, what are they doing wrong?

The above chart explains it. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades.

Let’s use EUR/USD as an example. We know that EUR/USD trades were profitable 59% of the time, but trader losses on EUR/USD were an average of 127 pips while profits were only an average of 65 pips. While traders were correct more than half the time, they lost nearly twice as much on their losing trades as they won on winning trades losing money overall.

The track record for the volatile GBP/JPY pair was even worse. Traders were right an impressive 66% of the time in GBP/JPY – that’s twice as many successful trades as unsuccessful ones. However, traders overall lost money in GBP/JPY because they made an average of only 52 pips on winning trades, while losing more than twice that – an average 122 pips – on losing trades.

That data above are from a series of studies into trader profitability conducted by the analysts at DailyFX. I hope you'll find the information useful for your project. :smart:

Good hunting!

Jason

 

[samirs]

Greed

 

[Purple Brain]

For example, in EUR/USD, the most popular currency pair, FXCM clients in the sample were profitable on 59% of their trades, and lost on 41% of their trades.

So if traders tend to be right more than half the time, what are they doing wrong?

Thanks for an excellent post Jason. The charts certainly outline my situation. Full risk losers – much of the time – and sub-1:1 winners. Even with a reasonable W:L it still knocks the stuffing out of your account. What you didn’t and couldn’t possibly mention is how to reverse that situation. With so many potential reasons for the problem it’s not hard to understand why. Certainly advice from more experienced members on this site has helped me start to turn my performance around, but I am beginning to realise there is no one size fits all solution to the myriad problems besetting inexpereinced traders.

Apart from thanking you for your post I wanted to ask you a question Jason.

Your statement that based on your data traders are right more than wrong sets itself against the accepted wisdom of far more (95% gets thrown about a lot) traders lose than win over the long haul. Does your data confirm that those 59% who got their eur/usd trades right, got 59% all of their trades right. And were all of those 59%-ers still trading 6 months after that data was collated?

My point being that at any given time a broker can point to a set of traders that have more in their account than they started with, but it would be interesting to know say 6 months down the line, what percentage of that set of successful traders (defined as actively trading and more in their account than they started with) were still in that category.

Is that something you can share with us Jason?

 

[Rhody Trader]

I've got data which back's Jason's data up. Roughly 60% of trades end up profitable. The problem is the losers average being substantially larger than the winners. In academic research terms, it's classic Disposition Effect.

 

[Purple Brain]

I've got data which back's Jason's data up. Roughly 60% of trades end up profitable. The problem is the losers average being substantially larger than the winners. In academic research terms, it's classic Disposition Effect.

Do you have access to any data which would shed light on the query I made on trader longevity Rhody Trader?

 

[Jason Rogers]

Thanks for an excellent post Jason. The charts certainly outline my situation. Full risk losers – much of the time – and sub-1:1 winners. Even with a reasonable W:L it still knocks the stuffing out of your account. What you didn’t and couldn’t possibly mention is how to reverse that situation.

The main lesson I take from this research is that win percentage is not as important as expected value. To understand this better, let's focus on the data regarding GBP/JPY trades from my previous post.

Traders were right an impressive 66% of the time in GBP/JPY – that’s twice as many successful trades as unsuccessful ones. However, traders overall lost money in GBP/JPY because they made an average of only 52 pips on winning trades, while losing more than twice that – an average 122 pips – on losing trades.

It did not matter that 66% of the GBP/JPY trades were winners, because the losses taken on the other 34% of trades more than cancelled out any profits made. This is where expected value comes in. Take a look at these two examples.

Trader A

• Win percentage: 66%
• Average amount made on winning trades: 52 pips
• Average amount lost on losing trades: 122 pips

If he places a trade, then it has a 66% chance of making 52 pips, and a 34% chance of losing 122 pips.

• Expected value = (0.66 * 52) - (0.34 * 122) = 34.32 - 41.48 = (-7.16)

Trader A's expected value is (-7.16) which mean on average he loses 7.16 pips per trade. He may win 66% of the time, but in the long run he will lose money.​

Trader B

• Win percentage: 34%
• Average amount made on winning trades: 122 pips
• Average amount lost on losing trades: 52 pips

If he places a trade, then it has a 66% chance of making 52 pips, and a 34% chance of losing 122 pips.

• Expected value = (0.34 * 122) - (0.66 * 52) = 41.48 - 34.32 = 7.16

Trader B's expected value is 7.16 which means on average he makes 7.16 pips per trade. He may lose 66% of the time, but in the long run he will make money.​

A high percentage of winning trades is not as important as having a positive expected value. A big part of achieving a positive expected value is having a good risk/reward ratio. It's a good idea to seek more as reward than you're willing to risk on a trade.

Apart from thanking you for your post I wanted to ask you a question Jason.

Your statement that based on your data traders are right more than wrong sets itself against the accepted wisdom of far more (95% gets thrown about a lot) traders lose than win over the long haul. Does your data confirm that those 59% who got their eur/usd trades right, got 59% all of their trades right. And were all of those 59%-ers still trading 6 months after that data was collated?

My point being that at any given time a broker can point to a set of traders that have more in their account than they started with, but it would be interesting to know say 6 months down the line, what percentage of that set of successful traders (defined as actively trading and more in their account than they started with) were still in that category.

Is that something you can share with us Jason?

It's important to note that even though the data from the DailyFX profitability study show that 59% of trades were winners, the 41% of trades that were losers more than cancelled out the profits resulting in a negative expected value as I mentioned above. That is why more traders lost despite the majority of their trades being winners. Below is a table from the same study that shows the percentage of profitable traders.

Research shows that the amount of capital in your trading account can affect your profitability. Traders with at least $5,000 of capital tend to use more conservative amounts of leverage. Traders should look to use an effective leverage of 10-to-1 or less.

 

[Purple Brain]

Jason, thanks for your most recent post explaining the significance of positive expectancy. Although the formula is well known - the means to achieve that happy state is far less so. The vast majority of posts on this site are in some way connected to the search to find a way to increase one's W:L and to improve ones average win per trade while reducing one's average loss per trade.

The question I raised yesterday was probably not phrased well enough as you haven't address it at all. I'll rephrase it.

First a couple of definitions:
1. Active Trader - someone who has placed at least one trade in the last month.
2. Account with trading profit: A trading account which has a larger positive balance than the net inflow of deposited funds and accrued interest. i.e. profit directly derived from trading activity.

Now the question: At FXCM what percentage of your current set of Active Traders who have been active traders for more than 6 months and who have an account with a trading profit were in that same set 6 months previously?

The reason I ask is that I posed a similar question to my broker, OANDA, and the fudged and finagled and got uncomfortable and ultimately didn't answer the question. The way they calculate profitable trading accounts is to include all accounts which have a larger balance this month than last, regardless of the frequency of any trading activity -or any trading activity at all. So all the dead accounts which haven't traded for years which attract even just one hundredth of a cent's interest on the couple of cents left in it will qualify as a profitable account.

There is a great deal of debate around the success rate of retail traders and while any one broker's data will not be statistically significant, it will give us a better idea of the failure rate.

While at any time you may have say 60% of your traders with a trading profit, my guess is they were not the same 60% as 6 months ago. Without the influx of new customers to replace the defeated ones that percentage would reflect the reality. If FXCM didn't take any new customers on for 6 months, what would be the percentage of active traders with an account with a trading profit at the end of that 6 months.

I hope my question is more clearly stated now.

 

[Liquid validity]

Purple, the basic gist is your winners really need to be larger than losers.
Yeah I know - hardly a revelation...

In very basic terms, thats either trailing stops, or target larger than stop.
Obviously, there are other ways - support and resistance, price coming up
from support,stop below support, resistance further away from current price than stop.

If you use that Ninja replay data I told you about before, it will allow you
to experiment much faster with stops, targets, trailing stops and levels than doing it realtime.

If you want an example to try, other than the S&R example, try trailing stops
in trend direction - tip - trailing stops don't generally work that well
if they are too tight - say at least 15-20 points on EU.
Generally works better on higher timeframes / ticks.
Trick is in identifying and not taking rangebound trades...
Nothing to stop you using a target with a trailing stop either (usually that just limits profit though).

 

[timsk]

For example, in EUR/USD, the most popular currency pair, FXCM clients in the sample were profitable on 59% of their trades, and lost on 41% of their trades.

So if traders tend to be right more than half the time, what are they doing wrong?

We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades.

Hi Jason,
Interesting charts - thanks for posting.

I'm constantly amazed by the number of new members joining T2W who don't ever consider other markets and instruments and think that forex is the only market worth trading. I don't doubt that if other brokers offered the same charts as yours for equities, commodities and indices etc., that the general picture would be very similar and the same conclusions could be drawn. Nonetheless, it does illustrate that forex isn't the easy fast track to unlimited wealth that so many newbies appear to think it is.

What I can't answer - is why the profit to loss ratio on EUR/USD is roughly 2:1, but on AUD/JPY it's nearer 1:1? I don't trade forex, so perhaps there's something about the individual characteristics of those two pairs that cause FXCM clients to trade them differently and apply different risk management criteria to each? Be that as it may, based on those charts, the 'best' pair to trade (as in not losing too much too quickly, lol!) looks like being USD/CAD.
Tim.

 

[Liquid validity]

I'm constantly amazed by the number of new members joining T2W who don't ever consider other markets and instruments and think that forex is the only market worth trading. I don't doubt that if other brokers offered the same charts as yours for equities, commodities and indices etc., that the general picture would be very similar and the same conclusions could be drawn. Nonetheless, it does illustrate that forex isn't the easy fast track to unlimited wealth that so many newbies appear to think it is.

What I can't answer - is why the profit to loss ratio on EUR/USD is roughly 2:1, but on AUD/JPY it's nearer 1:1? I don't trade forex, so perhaps there's something about the individual characteristics of those two pairs that cause FXCM clients to trade them differently and apply different risk management criteria to each? Be that as it may, based on those charts, the 'best' pair to trade (as in not losing too much too quickly, lol!) looks like being USD/CAD.
Tim.

Agree, and you are right, in many ways FX is actually worse.
Stocks = more chance of finding something trending.
Indices = not as restricted in terms of range.
FX = largely rangebound due to CB tactics, pegging and cross border trade hedging etc.
Notable exceptions are AUD and JPY pairs - due to rates (Daily).
Not being aware of that certainly doesn't help...
If you are aware, you can turn it to your advantage.

For me the primary attraction was greater timespan for intraday time decay (only when applicable).
As close to an overnight hold as you will get, but still flat each day, simple as that.
If its big trends, then obviously ES, YM and NQ have been better,
plus you have volume / tape etc.
For me the PITA is PDT, wire transfer hassle (have to do wires on phone with my bank...),
connection lag to U.S. servers etc.

 

[Splitlink]

Not enough research, trading for the sake of it. Refusing to take losses. Small profits, big losses are a few reasons that pop to mind.

That, IMO, is a very important factor. It is surprising how I will take a loss of 10 points and be reluctant to close at a 10 point profit. I want it to go higher and, when it starts to run back instead, I take any kind of profit, even at breakeven so as not to take a loss. What about the times that it starts to reverse on the opening, though? Taking the profit does not arise and the 10 point stop is triggered in the end. This means a lot of mediocre trades, plus trades that are stopped before the good one comes along, if it comes along.

It is a very difficult problem to solve and if the trader is not careful it becomes, quite often, a death of a thousand cuts.

 

[Jason Rogers]

Jason, thanks for your most recent post explaining the significance of positive expectancy. Although the formula is well known - the means to achieve that happy state is far less so. The vast majority of posts on this site are in some way connected to the search to find a way to increase one's W:L and to improve ones average win per trade while reducing one's average loss per trade.

The question I raised yesterday was probably not phrased well enough as you haven't address it at all. I'll rephrase it.

First a couple of definitions:
1. Active Trader - someone who has placed at least one trade in the last month.
2. Account with trading profit: A trading account which has a larger positive balance than the net inflow of deposited funds and accrued interest. i.e. profit directly derived from trading activity.

Now the question: At FXCM what percentage of your current set of Active Traders who have been active traders for more than 6 months and who have an account with a trading profit were in that same set 6 months previously?

The reason I ask is that I posed a similar question to my broker, OANDA, and the fudged and finagled and got uncomfortable and ultimately didn't answer the question. The way they calculate profitable trading accounts is to include all accounts which have a larger balance this month than last, regardless of the frequency of any trading activity -or any trading activity at all. So all the dead accounts which haven't traded for years which attract even just one hundredth of a cent's interest on the couple of cents left in it will qualify as a profitable account.

There is a great deal of debate around the success rate of retail traders and while any one broker's data will not be statistically significant, it will give us a better idea of the failure rate.

While at any time you may have say 60% of your traders with a trading profit, my guess is they were not the same 60% as 6 months ago. Without the influx of new customers to replace the defeated ones that percentage would reflect the reality. If FXCM didn't take any new customers on for 6 months, what would be the percentage of active traders with an account with a trading profit at the end of that 6 months.

I hope my question is more clearly stated now.

There seems to be some confusion here. I never said that 60% of traders were profitable. Rather the data in my original post showed that despite the fact that 59% of trades were closed for a profit, traders were still losing overall. That's because their losses on the other 41% of trades more than cancelled out the profits.

The data in my second post showed that over 37% of traders with at least $5000 in their accounts were profitable, while less than 21% of traders with least than $1000 in their accounts were profitable. That's because traders with more capital available tend to use less leverage which is better for risk management.

Those stats were compiled from active accounts which means they increased their equity over the tracking period due to trading profits. The tracking period was 3 months, not 6, because that's the time frame our regulators ask us to report to them every quarter. While I don't have stats available tracking 6 months instead of 3, I can say that the percentages remain pretty constant from one quarter to the next with traders using less leverage tending to outperform those who use more leverage.

There are 2 key points regarding risk management that we can take away from the data: Use a good risk/reward ratio and keep leverage under 10:1 :smart:

 

[Purple Brain]

There seems to be some confusion here. I never said that 60% of traders were profitable.

I know you didn’t Jason. I prefixed my 60% with the word “say” to indicate it was by way of an example. The 60% I chose at random was obviously too close to your 59% for you to avoid making a connection where there was none intended. My error.

Those stats were compiled from active accounts which means they increased their equity over the tracking period due to trading profits. The tracking period was 3 months, not 6, because that's the time frame our regulators ask us to report to them every quarter. While I don't have stats available tracking 6 months instead of 3, I can say that the percentages remain pretty constant from one quarter to the next with traders using less leverage tending to outperform those who use more leverage.

Jason I understand all the points you have made about leverage and inadequately capitalised accounts. I’m banging my head against the wall because I’m obviously still not being able to articulate what it is I’m asking which is nothing to do with the responses I’m getting from you.

You’re telling me that the number of profitable traders for any given 3-month period remains fairly constant – as a percentage. I’m asking, how many of those specific individual profitable traders remain in the set of profitable traders for an appreciable period – 6 months or more?

Let me make it even more specific. Joe Bloggs is one of the profitable traders as of January 2013 and by pure coincidence – all the other profitable traders at that point are all Bloggs and there are 1000 of them in this lucky group. After 6 months, how many Bloggs are still in this group?

You (at FXCM) possibly have profitable traders that have been with you for years. I’m interested in the relative mortality rate of traders – those who close out their account or do not use them any longer and ended up with less money than they started with.

 

[Jason Rogers]

What I can't answer - is why the profit to loss ratio on EUR/USD is roughly 2:1, but on AUD/JPY it's nearer 1:1? I don't trade forex, so perhaps there's something about the individual characteristics of those two pairs that cause FXCM clients to trade them differently and apply different risk management criteria to each? Be that as it may, based on those charts, the 'best' pair to trade (as in not losing too much too quickly, lol!) looks like being USD/CAD.
Tim.

Like you, I was also interested in the disparity in performance between EUR/USD trades and AUD/JPY trades. While this was not something covered in the DailyFX study, I have a few humble theories of my own. First, EUR/USD is the first pair that most people who are new to forex tend to start out trading. People usually don't branch out to trading a pair like AUD/JPY until they have developed their skills and knowledge. Second, AUD/JPY tends to trend nicely, while EUR/USD is choppier. Just look at the two charts below covering the same time frame.

 

[Jason Rogers]

You’re telling me that the number of profitable traders for any given 3-month period remains fairly constant – as a percentage. I’m asking, how many of those specific individual profitable traders remain in the set of profitable traders for an appreciable period – 6 months or more?

I don't have 6-month data, since it wasn't part of the original DailyFX profitability studies, but I'll mention it to the analysts. Perhaps they can cover longer time frames in a future report. While they're at it, they might want to look into why AUD/JPY trades tend to be more successful than EUR/USD trades, since Timsk and I are both interested in the answer to that question.