How Many Traders Fail?

bevok

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In light of a couple of threads along this line, I've written a brief article looking at some of the studies along these lines.


One of the most frequent unsubstantiated statements of fact to be found in trading forums, books and courses is that 90% (or some similar number) of traders are unprofitable. For such an important statistic it is extremely rare to find any serious reference to the source of this information, and indeed most of these statements of fact are based on ‘common knowledge’ rather than serious study. Trading is plagued with statements of common knowledge which can be a minefield for new traders. Often they are based on opinion or are regurgitated by writers and educators who have little or no record of success in the markets. I will attempt to apply some science to this important fact relating to trading success – after all it is vitally important for traders to understand the odds of success.

It is likely of course that greater knowledge of the likelihood of success will not deter traders. Many people enter the markets in full acceptance of the risks that they are aware of. The reality of losing however often leads to the abandonment of trading except in cases where individuals have a pathological need for the excitement and thrill of trading, despite the financial consequences. A handful are able to master their emotions and apply the work and study required for lasting success. Traders hearing these often quoted statistics of 90% failure logically must conclude (unless they are completely fatalistic) that they will be in the top 10%. This overconfidence is a common facet of humans, especially males. A majority of people believe they are above average drivers for instance, a statistical impossibility. One benefit of a more scrupulous view of the success rates of traders might be that studies into the success of traders often explore the reasons behind their failure. This knowledge if correctly applied could be of practical benefit to speculators.

One of the most recent studies of the success of traders was by Brad Barber of the University of California, Davis. In his paper Do Individual Day Traders Make Money? (2004) he obtained data on all trading transaction data on the Taiwan Stock Exchange between 1995 and 1999. Day traders make around 20% of total volume and Barber focussed on these participants. He found that “heavy day traders appear to trade at favourable prices, but only a select few are sufficiently savvy to consistently earn profits net of their trading costs. More than eight out of ten day traders lose money in a typical semiannual period”. Interestingly the successful traders (less than 20% of day traders) who were profitable in each six month period assessed continued to earn stellar returns. The average annual income was $NT 1 million. This makes clear that the minority of successful traders were not just lucky.

Brad Barber (with Terrance Odean) also conducted another, US based study in 1998. This study (The Courage of Misguided Convictions) used data from 10,000 randomly successful accounts from a US national discount brokerage that were active in 1987. This study was specifically interested in whether traders sold gains more readily than realising their losses. They found that a stock that was up was about 50% more likely to be sold than one that was down.

One study which did find evidence that day traders are profitable was Harris & Schultz’s The Trading Profits of SOES Bandits. This did find evidence that traders were able to beat market makers. It must be said however that these were specific traders using the Nasdaq SOES platform who were able to trade within the Bid/Ask spread using Instinet or SelectNet. I would argue that these traders are not representative of the typical retail trader for this reason.

More commonly cited is Ronald Johnson’s study Day Trading: An Analysis of Public Day Trading at a Retail Day Trading Firm. This randomly chose 30 accounts from a day trading firm. In this case 70 % of the accounts list money. More importantly all of the losing accounts were traded in a manner that had a risk of ruin of 100%. Of the eight successful accounts three were traded with a high risk of ruin and low average trade size. The performance of these accounts was highly dependent on a single trade. Only three accounts showed profitability, sound reward/risk ratios and low risk of ruin. The best trader wasn’t actually a day trader, holding positions for an average of 47 days with no day trades.

One of the best known studies is that of Blair Stewart (An Analysis of Speculative Trading in Grain Futures, 1949) who obtained the complete trading records of 8922 customers of a trading firm which went bankrupt in the 1930s. The study found that 75% of the speculators lost money. Some of the points noted were:
- a clear tendancy to cut profits short and let losses run
- more likely to be long than short
- long speculators tended to buy on days of price declines, and shorts sold on price rises. Most traders thus based decisions on price levels rather than price movement.

Another study was conducted by Thomas Hieronymus (Economics of Futures Trading, 1977). He obtained summary records from a firm for the year 1969. In this case 65% of traders lost money. Regular traders did better, and their nett profits were nearly enough to overcome their losses.

The authors of the book The Futures Game (Richard Teweles and Frank Jones) studied the records of a ‘respected’ brokerage firm over 10 years beginning in 1962. The percentage of traders with profits in any year ranged from a low of 14% to a high of 42%, with an average of 26%.

This certainly isn’t a completely comprehensive look at every single study ever conducted, however I believe it encompasses most of the well known and verified ones. Overall, the commonly held theory that 90% of traders lose money seems high, with around 75% a more accurate number. It should be noted however that many of these studies were carried out before the advent of deep discount brokers with significantly smaller commissions. It would be interesting to obtain more recent data to see if the reduction in costs has had any impact on the profitability of traders. The vastly increased participation and ease of access might have some effect as well, with more ‘casual’ participants (rather than a more select sector of the population with higher net worth as in the past) perhaps being more or less successful than traders in the past.
 
In theory, would we not be able to obtain a true picture from the records of brokers and spread-betting firms? This could obviously only cover the client as seen by his account with that particular firm, and he may have several accounts, but still, it would be a start.

I keep quoting from this site, and apologies for that, but it is useful:

http://www.financial-spread-betting.com/

I think one of the SB reps in there gives some statistics. It won't be the complete picture, but it is something.
 
I did find the following on there with no source;

"Current estimates show that almost 90% of those that 'Play' (we're not playing) the Financial Spread Betting markets lose their deposits or close their accounts within 3 months."

Its the obvious source going to the brokers/spreadbetting companies, however historically they've been fairly silent on the subject - for obvious reasons perhaps!
 
Overall, the commonly held theory that 90% of traders lose money seems high, with around 75% a more accurate number.

It would be interesting to know what type of trader, instruments and markets the information refers to. I doubt very much that it applies to the daytraders that have surfaced in recent years dabbling in futures and currencies.

I doubt if one in four daytraders are profitable. The path is long and hard and many just fall by the wayside because of lack of commitment.

However from those that persist over a much longer period that 90% may be high but only just.

The very nature of trading is one that breeds failure.
 
Interesting post. it seems most of the surveys were done years ago before we had direct access ourselves. The effect of the spread wasnt really studied.For the first few years of trading I ran up big loses and on looking back most of that was dealing costs.When I first started it was £25 for a round turn on ftse future.As the costs got cheaper I lost less. Imagine a day trader taking two trades a day costing £50,thats £1000pcm. Now it would be under £400(and thats with a sb firm and no tax). I honestly believe that now most traders simply lose through ill discipline and poor money management. A 1 pip spread on eur/usd and yet over 80% still lose we are told.
 
Well I suppose if you want to be truly rigorous, you need to define what you mean by "fail", as many traders "fail" before coming back to try again, with some succeeding.

You're never going to know the answer, and it's not even worth trying to be precise. I started a poll a few weeks back "how many people are self funded independent traders".. about 2 pct of the total number who viewed the thread responded in the affirmative.

Whether it's 80 or 90 pct, I think it's safe to assume the vast majority of retail traders lose money over time, and that in itself is the interesting part. Why do people lose money? There are two threads out there on t2w right now about this, and for me this is the interesting question. Surely you would imagine 50 pct would win, 50 pct would lose, but no. Even allowing for bid/ask and commissions, you would think 40:60 for w:l. But no, it's 20:80 or 10:90. That is the issue.
 
wrong statisc, "it is extremely rare to find any serious reference to the source ..."

"... is that 90% (or some similar number) of traders are unprofitable... of this information, and indeed most of these statements of fact are based on ‘common knowledge’ rather than serious study"

take a look at "near-realtime entries of trades" in this forum and u will recognise that 99.9% of all trades are non-profitable trades.
the conclusion of this is that 90% of all traders fail at the first day of their trading carreer.
 
Re: wrong statisc, "it is extremely rare to find any serious reference to the source

"... is that 90% (or some similar number) of traders are unprofitable... of this information, and indeed most of these statements of fact are based on ‘common knowledge’ rather than serious study"

take a look at "near-realtime entries of trades" in this forum and u will recognise that 99.9% of all trades are non-profitable trades.
the conclusion of this is that 90% of all traders fail at the first day of their trading carreer.

Why not back check all of the trades that are called live on the live forex thread and you will see that most traders on there are way ahead. Why not call some yourself.Yesterday over 100 pips were called live.
 
Julian (L.F.) raises some good points, IMHO this oft quoted *losing* stat. is misleading. Perhaps you've been here too long when you realise you're repeating yourself, but here goes;

I refuse to accept that anyone who has dedicated the 3 years of effort I have to this industry has an 80-90% chance of failure. I'd suggest they have a 50% chance of success and by success I mean being able to eek out a living by consistently playing their edge day, after day, after day...

According to my SB contacts 20-40% of spread-betters are consistent winners..Which is also why the *house* always wins; the SB firms and or brokers do not have to/need to manipulate the rules of the game/shift the goalposts, that win loss ratio means they're doing fine..

I'd suggest the majority of overall winners fall into the group that treat this industry as a profession...
 
Re: wrong statisc, "it is extremely rare to find any serious reference to the source

Why not back check all of the trades that are called live on the live forex thread and you will see that most traders on there are way ahead. Why not call some yourself.Yesterday over 100 pips were called live.

Assuming that they are actually taking these trades, and that the trades they take but do not post are not losers.
 
Thats interesting Black Swan. I agree that the stats leave a lot to be desired as commissions have plummeted since the time they were done (as well as the advent of SB/FX), which might have made some marginal techniques profitable. My feel is that it probably hasn't made that much difference but it would be good to revisit it. The only way to really assess would be to look at all accounts over a three year period for a large brokerage. Many of the losers would probably be people who came into the game, gambled a bit and dropped out. Of those who were still in the game after three years most surely would be winners, apart from the chronic failures and addicts. There are lots of traders who never make a dime but stick at it for the thrill of taking a risk!
 
Well I suppose if you want to be truly rigorous, you need to define what you mean by "fail", as many traders "fail" before coming back to try again, with some succeeding.

You're never going to know the answer, and it's not even worth trying to be precise. I started a poll a few weeks back "how many people are self funded independent traders".. about 2 pct of the total number who viewed the thread responded in the affirmative.

Whether it's 80 or 90 pct, I think it's safe to assume the vast majority of retail traders lose money over time, and that in itself is the interesting part. Why do people lose money? There are two threads out there on t2w right now about this, and for me this is the interesting question. Surely you would imagine 50 pct would win, 50 pct would lose, but no. Even allowing for bid/ask and commissions, you would think 40:60 for w:l. But no, it's 20:80 or 10:90. That is the issue.

Good point about the true meaning of "fail". I would say trading is not that different from any other hobby/sport/profession in the world.

How many people fall on their butt ice skating and never want to go again?

How many people throw an airball in basketball and are afraid to set foot on the court there-after?

Quitters are out there. So are stubborn folks who will do something until they master it, no matter how arduous the task. It's not whether you're 'lucky' enough to be in the 5-25% (whatever the current statistic says) it's whether you will quit before you get there.

Training your mind and emotions to work in your best interest is the most difficult task a human can take on, so expect blood, sweat and tears.
 
Julian (L.F.) raises some good points, IMHO this oft quoted *losing* stat. is misleading. Perhaps you've been here too long when you realise you're repeating yourself, but here goes;

I refuse to accept that anyone who has dedicated the 3 years of effort I have to this industry has an 80-90% chance of failure. I'd suggest they have a 50% chance of success and by success I mean being able to eek out a living by consistently playing their edge day, after day, after day...

According to my SB contacts 20-40% of spread-betters are consistent winners..Which is also why the *house* always wins; the SB firms and or brokers do not have to/need to manipulate the rules of the game/shift the goalposts, that win loss ratio means they're doing fine..

I'd suggest the majority of overall winners fall into the group that treat this industry as a profession...

These statistics are probably accurate IMO, but from day 1, most people know which part of the crowd they are.
 
My two cents, the chances that you fail in trading can be applied to anything in life........the odds of being a top barrister or top brain surgeon or top psychiatrist, the chances you join officer school and become a general are just as slim...or even wether your future wife will be a stunner all these things are as likely to end in failure........most people fail fullstop in anything they try to do and only 10% succeed generally speaking. So does that mean we dont try just because its hard to succeed off course not, what we do is give our very best in order to slightly improve the odds for being successful
and some get a bit of self made lady luck and some dont thats just life unfortunately
 
If you're a successful trader then you have a higher chance of a stunning wife ... Noam Gottesman is somehow going out with Lucy Liu, for example.
 
Ha, ha... sounds like Noam Gottesman needs glasses!

Keep in mind that if you stick to your trading plan and exit with your strategy for protecting capital, even if you did not make money on the trade that went against you, it is still a winner and not a loser.

Letting your losses run by lacking discipline and cutting your profits short by ignoring your trading plan, are both losses even if you still exit a trade with a profit.
 
Contrast this by TWI who started at a prop firm and is at a hedge fund now

Many people think if you make 20-30% a year that you are doing brilliantly well. Many here will make 50-100% per month. It is not a methodology you could apply to large amounts of capital such as fund trading but for individuals accounts it cannot be bettered.

and this incredible guy here

55000 % in ONE month !

and TWI again

I have seen many many people try to do their own thing over the years and I am convinced that there are actually not too many people who can be consistently successful at it. The success does not seem to lie in the method so much as the discipline. I think the most common thing I have seen is for inexperienced traders to lose discipline when thier "bulletproof" method has a few consecutve losses. No matter how much testing and paper trading and pledges to stick to it occured before, real losses can really throw all that into the dustbin and so begins the path to failure. The reality is plan the trade and trade the plan, no exceptions.

with

The focus of this study is the habitual speculator in commodity futures markets. The speculator's activity broadens a market, creates essential liquidity, and performs an irreplaceable pricing function. Working knowledge of the profiles and motivations of habitual speculators is essential to both market theorist and policy makers. Responses to a 73 question survey were collected directly from retail commodity brokers with offices in Alabama. Each questionnaire recorded information on an individual commodity client who had traded for an extended period of time. The typical trader studied is a married, white male, age 52. He is affluent and well educated. He is a self-employed business owner who can recover from financial setbacks. He is a politically right wing conservative involved in the political process. He assumes a good deal of risk in most phases of his life. He is both an aggressive investor and an active gambler. This trader does not consider preservation of his commodity capital to be a very high trading priority. As a result, he rarely uses stop loss orders. He wins more frequently than he loses (over 51% of the time) but is an overall net loser in dollar terms. In spite of recurring trading losses, he has never made any substantial change in his basic trading style. To this trader, whether he won or lost on a particular trade is more important than the size of the win or loss. Thus he consistently cuts his profits short while letting his losses run. He also worries more about missing a move in the market by being on the sidelines than about losing by being on the wrong side of a market move; i.e., being in the action is more important than the financial consequences. Participating brokers confirmed that for the majority of the speculators studied, the primary motivation for continuous trading is the recreational utility derived largely from having a market position.

and it's pretty obvious why most lose more than they make from markets, they wanna be right more than they wanna make money, that's then the loonies spending their entire trading careers spouting off on forums about holy grails and trading being really complicated yada yada just cause that makes em seem even cleverer yet again, an appearance of success which is really all they care about with their high winning percentages and whatnots, irrespective of the fact they're overall net losers lol !
 
He's (was) a good poster TWI, one of the first I used to look for when I first found T2W...
 
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