Why do traders fail?

Splitlink

Legendary member
10,850 1,234
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

Senior member
2,772 93
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

Experienced member
1,613 179
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

Senior member
2,772 93
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.

w6hh.png
 
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Jason Rogers

Senior member
2,772 93
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.
 

neil

Legendary member
5,167 749
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 chart below covering the same time frame.

w6hh.png

Thanks Jason - that was worth knowing. I think I will keep this one on my watch list:)
 

timsk

Legendary member
7,604 2,377
. . . 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.
Hi Jason.
Many thanks for this. It's really useful stuff and the kind of thing that newbies to T2W wanting to trade forex need to know. This, combined with the stats you've posted thus far offer compelling evidence about risk management, leverage and choice of instrument.

On a separate note, I think I see what Purple Brain is driving at. I may have misunderstood him, but I think the general gist is along the lines of: did the traders who were profitable over the 3 month study period just get lucky and then crash 'n burn soon after, or were they able to repeat their success, indicating that they can take profits on a consistent basis over an extended period of time? I.e., did they just get lucky like the masses of long only equity traders in the run up to the dot com bubble in 2000, or have they acquired genuine lasting skill that enables them to trade in all types of markets - trending, range bound or otherwise!
Cheers,
Tim.
 
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Jason Rogers

Senior member
2,772 93
Hi Jason.
Many thanks for this. It's really useful stuff and the kind of thing that newbies to T2W wanting to trade forex need to know. This, combined with the stats you've posted thus far offer compelling evidence about risk management, leverage and choice of instrument.

Thanks Tim, I'm glad if the info I provided can be helpful to the OP and others.

On a separate note, I think I see what Purple Brain is driving at. I may have misunderstood him, but I think the general gist is along the lines of: did the traders who were profitable over the 3 month study period just get lucky and then crash 'n burn soon after, or were they able to repeat their success, indicating that they can take profits on a consistent basis over an extended period of time? I.e., did they just get lucky like the masses of long only equity traders in the run up to the dot com bubble in 2000, or have they acquired genuine lasting skill that enables them to trade in all types of markets - trending, range bound or otherwise!
Cheers,
Tim.

PB asked some great questions, and I definitely see the value in gathering data for longer time frames to see which traders continued to have success. While 6-month data wasn't covered in the original DailyFX studies, I have some more humble theories :cheesy: regarding your questions. Since, the percentage of profitable traders has remained fairly similar quarter after quarter for several years, I'm inclined to think this is not a case of traders doing well only in certain market conditions like what happened with the dot com bubble.

However, the question remains of how many of the traders who were profitable over 3 months continued to be profitable after 6 months or a year. This is something that we are currently studying with TopTradr. We're co-hosting a trading contest with this prop trading firm that wants to find people capable of producing consistent returns, so that firm can back these traders with their money. The reason FXCM got interested in the idea is because we used to host a monthly King of the Micro trading contest a few years ago, but found that the winners were seldom able to repeat their success. Only a handful of traders won the KOM contest multiple times. We hope that the new TopTradr format will highlight traders who achieve long term success and impart their knowledge to others.
 
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Purple Brain

Experienced member
1,613 179
Timsk - I’m glad someone else got what I was getting at.

Jason - I’m going to assume it is my fault in lacking the necessary articulation, erudition and intelligence to pose the question in such a way that you could provide a clear answer.

However, others viewing this thread may not be quite so charitable in their assessment of your responses.

Forget 3 months, 6 months – you’re getting hung up on something that isn’t the central issue.

I’ll give it one more try.

Archie, Bertie, Charlie, Dave, Edward, Frank, Gordon, Harry, Ian and James all place their first trade with FXCM on the same day. After 12 months how many of those original 10 are still actively trading AND have an account showing profits from their trading activities.

There is churn in every brokerage. Clients come client go. But there remain a small core of clients who are successful. For every 100 clients that come on board, many (most) will close their account or simply become dormant with less than they deposited within 12 months. What is that percentage?

FXCM has that data. Every broker has that data. They are the only ones who know the reality of trader success/failure. Would you be prepared to share that data with us?
 
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Purple Brain

Experienced member
1,613 179
Had a brainwave. Forget everything that’s gone before regarding my query.

Regardless of whether an account is closed, dormant, active – of all the client accounts FXCM has and has had - all of them - what percentage of these meet the following criteria:-

(Withdrawals + Current Balance) > (Deposits).

Thanks.
 

Purple Brain

Experienced member
1,613 179
I think a blog post I did earlier in the year speaks to your question: Starting to detail forex profitability data, which generated a bit of thread conversation here.
Many thanks Rhody Trader. Nothing beats an intelligent analysis of empirical data.

“In other words, the consistency rate is low in general terms. On average, less than half of those who make a profit in one quarter do so again in the next quarter. That means we can expect less than 15% of accounts profitable in one quarter to be so again the next, based on the broker-reported data. And seeing as the data I’m using here is from what looks to be a somewhat above average group of traders, we can probably shave a bit off even that 15%.
Furthermore, even among the 15% who are able to repeat, less than half are able to do it multiple times. That means not only is there no consistency among the profitable traders broadly, but there’s not a great deal among those who experience success – at least until you get further out into those who have a history of repeating.”.

Based on your analysis which I quote above, would it be reasonable to suggest from any given sample size of traders, by the end of the first 12 months trading, less than 2% will be generating consistent profits?
 

Purple Brain

Experienced member
1,613 179
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.
 
 
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