Why do traders fail?

[Rhody Trader]

@Rhody: Would that perhaps be the wrong way to account for consistency? It's certainly one way of measuring it, but it has to be extremely tough to keep it up. We can't all have winning quarters, after all. Maybe measuring an average profitability over say 5 years would lend to a different view of profitability?

Consistency definitely needs to be considered in terms of trading frequency. If you're a day trader, then looking at things on a weekly or monthly basis would be legit. If you're a swing trader, then monthly or quarterly is certainly reasonable timeframe to be looking at. If you only trade once a month, then maybe should should be looking at things on a yearly basis.

If you want to use 5 years, though, you're going to lose a large % of the population through attrition.

At the same time, I'm sure all the really good traders aren't retail. They have their own funds or work in institutions/companies that provide the kind of resources you wouldn't have access to as a retail. So the implication is that if someone is good enough as a retail guy, then he's going to move on up and the retail stats will suffer as a result.

My data includes some that we'd likely consider pros or small shops. It's not a big percentage, of course.

 

[Purple Brain]

This begs the obvious question: at what point can a trader feel confident in their ability and know that they have a strategy with a positive expectancy that is sustainable in the long term? In other words, at what point can simple basic luck be ruled out as an explanation for their continued success?
Tim.

A depressing thought indeed timsk. But one that could be answered, in principle.

If we knew of all the retail traders who had embarked on their trading career how many were still profitably trading say 2 years later, stated as a percentage of all those traders – that would give you your answer. We need a way of filtering out the strangely anomalous data that suggests the most recent quarter shows a success rate far above that which we intuitively (and in my case, empirically) know to be the case. We can do that by only looking at accounts a minimum 2 years old.

To reiterate, I’m not taking aim at FXCM here at all, or indeed any broker. I fully appreciate the odds of consistent success are low and I’m one of the deluded masses who believe we can be successful in this endeavour. Our broker is a key part of our means to achieve that and we respect the service and facilities they provide – or if we don’t, we find another one.

I asked my own broker (OANDA) the same question and they gave me the run around too and you can understand why they would not want to publicise this data, but as I stated in an earlier post – I genuinely doubt full declaration of this data would have any negative effect on client take on.

Jason: Of all accounts opened since FXCM first opened its doors to clients up to a cut-off point 2 years ago in September 2011, how many accounts either closed in profit or are currently in profit – stated as a percentage of the total?

I appreciate you probably will not be permitted to answer that question directly Jason, but if it is around 2%, just nod your head.

 

[VielGeld]

I'm getting a headache here. May I suggest moving this debate to a different thread as it is cluttering up this one? I wouldn't mind moving all the relevant posts as well.

 

[Liquid validity]

I'm getting a headache here. May I suggest moving this debate to a different thread as it is cluttering up this one? I wouldn't mind moving all the relevant posts as well.

Sounds good to me, all this crap is derailing this thread.

 

[VielGeld]

Righty-o. 74 posts moved to a new thread. Hope you don't mind if it's the SB subforum. If you can think of a better title, I'm open to that as well.

 

[Shakone]

In terms of % of successful traders

What % of traders actually want to make money, rather than want to be right on every trade or want to have some thrills?

What % of traders have actually written a trading plan, and what % of these are willing to stick with it rather than change the plan at the first sight of trouble?

What % have backtested and forward tested a plan and found it profitable?

I'd guess the % is surprisingly small for all of these.

 

[George55]

To my view traders mainly fail because they don’t have enough trading skills and experience, they are not able to control their emotions and what is most important they fail because of risk management. Risk management is the most important facet of investing. It’s the one that virtually all investors don’t care about or don’t even really think about.
Cheers!!

 

[Triggerfish]

-

 

[NVP]

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

hey Jason - this is an interesting analysis

I'm surprised at the high levels of pips here being shown .....clearly people are trading at higher/longer time periods than I was anticipating

anyway - if we were to assume for 1 second that those losses were aligned to average stop losses being hit ..........(say 100 pips) .......and ignoring the obvious problem with consolidating all data in one bucket (I would love to see this breakdown of pips broken down further and split profitable and non profitable traders)

then we can see that people are taking profits far to early on winners to deliver long term profitability.......something alluded to by many in this thread as part of the human frailty of taking their pleasures early........

interesting - thanks :smart:

N

 

[NVP]

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.

hmmmm.....the volumes being traded on each pair will probably answer this Tim

N

 

[NVP]

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.

to be honest I hate setting fixed targets ............its very very non productive in trading and over-rated ............and clearly not a good idea from the results being posted by Jason

focus on having a good system for entry (market dynamics) ..and focus on 100% quality in execution .....and then 200% focus on executing a proven robust Exit strategy......each and every trade ......time after time ....rain or shine

to chase the big winners you will have to sacrifice more losers and watch some half decent profits turn to losses.......time after time

I think its dreaming to achieve anything better ..........read about the trend followers ............big drawdowns but phenomenal overall profits longer term generally

N

 

[NVP]

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.

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.

in line with this profitability questioning

there is a fantastic youtube TV interview of Bloomberg or CNN interviewing one of the big UK Brokerages where the CEO eventually admits only a very few of his Customers make money ........its very paxman and excellent value

its on my strengthmeter thread somewhere but I cant find it .......or on youtube now

Grrrr
N

 

[NVP]

Jason (FXCM) - just occurred to me you may have thought I had the daggers out for you with my insistent questioning. Massive apologies if I gave that impression. I am in your debt for the excellent posts and data you have posted in this thread. It’s just that you are one of the few guys in a position to know the real answer to the question on trader mortality and put this mythical “95% lose” to bed once and for all. When I see an opportunity to extract information I tend to press it. One of my many character flaws.

I have absolutely no axe to grind with brokerages and realise they have a business model based on profitability for the organisation while providing – generally quite decent – facilities for their clients.

fair do's....

c'mon - Jason is not going to give this kind of data out ...........corporate suicide

but anyone who looks at the numbers must realise only very very few survive and thrive in this industry .......and lets be honest .........if you are good you will eventually move onto Trading platforms and Markets that will serve you better than perhaps the entry brokerages / paltforms used in your first few years of your trading

this business is no different to any other highly competitive and challenging enviroment.......plenty of churn and carnage all the time ......:smart:

N

 

[NVP]

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:

ok closing the circle for me .........final post

1) low PERCIEVED barriers to entry/success (low cost/effort/easy/freebies/promises/dreams) = high volumes of new participants try it....

2) high ACTUAL barriers to success once entered...(requires experience/persistance/practice/Capital/mentoring/sacrifice/knowledge/consistency/luck)

theres plenty of things like this in life.......at least in Trading most people find out fast about the truths ..............unlike many other things where people sadly continue to delude themselves (and others) about their abilites or prowness for many years .....

for example I still think cowboy boots are cool.........poor deluded fool that I am ....hahahahahaha

N

 

[I'vereadthemall]

I think most traders fail because A) they have no system or B) they have no patience or c) they have outrageously unrealistic expectations.

I always think of the cagr of George Soros. It is about 20% over time.

For any trader to think that they could better Soros' average rate of return over a 5-10 year period would be akin to thinking that could beat tiger woods over 72 holes at Augusta. Yet so many seem to expect to be able to double their account every year...not going to happen!

I'm curious what your project is about...my masters thesis involved creating, testing and statistically verifying mechanical trading strategies.
A large part of my lit review was about behavioural finance though. After all of the research I did into the subject of trading systems and behavioural finance I came to the conclusion that the inability of a person to keep their emotions in check is the prime reason that they will lose as a trader.

A good place to start for learning about behavioural finance...
http://onlinelibrary.wiley.com/stor...036X.2007.00415.x.pdf?v=1&t=hnevfxm7&5dce39a6

 

[I'vereadthemall]

If the link doesn't work...search for 'behavioural finance: a review and synthesis'

 

[Shakone]

I think most traders fail because A) they have no system or B) they have no patience or c) they have outrageously unrealistic expectations.

I always think of the cagr of George Soros. It is about 20% over time.

For any trader to think that they could better Soros' average rate of return over a 5-10 year period would be akin to thinking that could beat tiger woods over 72 holes at Augusta. Yet so many seem to expect to be able to double their account every year...not going to happen!

I'm curious what your project is about...my masters thesis involved creating, testing and statistically verifying mechanical trading strategies.
A large part of my lit review was about behavioural finance though. After all of the research I did into the subject of trading systems and behavioural finance I came to the conclusion that the inability of a person to keep their emotions in check is the prime reason that they will lose as a trader.

A good place to start for learning about behavioural finance...
http://onlinelibrary.wiley.com/stor...036X.2007.00415.x.pdf?v=1&t=hnevfxm7&5dce39a6

Link didn't work for me. Is it Kahneman?

I don't think the analogy is great, but plenty of professionals have beaten Tiger Woods over 72 holes at augusta, and plenty will be trying again next year. Agree with the sentiment though.

 

[I'vereadthemall]

I should have emphasised...beginner to beat tiger woods or Soros...not going to happen!

 

[Jason Rogers]

clearly people are trading at higher/longer time periods than I was anticipating

Sadly, I think some of them were trading for longer time periods than even they were anticipating.

Here's a scenario: A trader with poor risk management places a trade without a stop loss hoping for a quick 50 pip profit. Unfortunately, the trade goes against them instead and without a stop loss they end up floating a loss of 50 pips instead. Reluctant to take this loss, they hold the trade longer and longer, risking more and more of their account. They might even try adding to their losing position which only increases their leverage and magnifies draw downs further in a trade that's trending against them.

I think this is how the average losses end up becoming so much bigger than the average winners. People aren't doing a good enough job managing their downside risk.

 

[rsh01]

People aren't doing a good enough job managing their downside risk.

there may be more to it than this.......

for instance, perhaps they do not know their strategy has an 'edge', or if they do - they have not quantified that 'edge' -ie they dont know that eg 40% of their trades will be losers. a common newbie trait.

therefore they will be more likely to change their entry/exit criteria, & possibly hang onto the loser cos it was the 5th one on the trot and there is no way they can trade that 'badly', ignorant to the statistical probability of having 5 losers on the trot, thus 'hoping' to be proved right in their red mist mind is the best way fwd so they let it run, and then average down etc etc.

been there.