Why do traders fail?

Rhody Trader

Senior member
2,620 266
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?

If we were to extrapolate from the observed persistence in the quarterly figures to say that only 50% of those who were profitable in one quarter were also profitable in the next, it would look at something like this:

30% profitable in Q1 (rough average of the quarterly figures for all brokers)
15% also profitable in Q2
7.5% also profitable in Q3
3.75% also profitable in Q4

I haven't looked at the numbers in a while and don't have them in front of me so I can't say how well that may be indicative of reality. I don't think it's too far off, though.
 

timsk

Legendary member
7,604 2,377
I haven't looked at the numbers in a while and don't have them in front of me so I can't say how well that may be indicative of reality. I don't think it's too far off, though.
Hi John,
If you plotted this on a chart it would be a straight descending line which, in effect, hits zero eventually. So, either all traders blow up eventually, or the line flattens out at some point to allow the elite handful to make consistent gains indefinitely. If it doesn't flatten out, then this would support the theory promulgated by some former members that traders simply get lucky and mistake their good fortune for real skill. The more their luck continues (i.e. Q4 taders and beyond), the more inclined they are to believe that's it's their trading skill that accounts for their success. Ultimately though, they're doomed to fail.

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.
 

Splitlink

Legendary member
10,850 1,234
In other words, at what point can simple basic luck be ruled out as an explanation for their continued success?
Tim.

I do not think that luck can be ruled out of anything, even where or how we were born---least of all, trading. But one has to make an effort to get lucky, all through life, so buying shares when the market is dropping like lead, may produce some instant fortunes but it is not a thing that I would do, or recommend. Trading short term is very random, in my view. although I do it.
 

neil

Legendary member
5,167 749
I do not think that luck can be ruled out of anything, even where or how we were born---least of all, trading. But one has to make an effort to get lucky, all through life, so buying shares when the market is dropping like lead, may produce some instant fortunes but it is not a thing that I would do, or recommend. Trading short term is very random, in my view. although I do it.

Think of that little sperm travelling in space and grows into Price Charles - that's luck.
 
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Rhody Trader

Senior member
2,620 266
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.

Tim, the last set of figures in my post at least moves us in that direction:

Among the 214 testable accounts with 4+ winning quarters, 171 (80%) were successful in going back-to-back more than half the time, with 67 being 100% successful (31%).

So if you can be profitable over 4 or more quarters you've got a good chance at sustaining success.
 

Jason Rogers

Senior member
2,772 93
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.

No offense taken, PB :D

If I could, I would provide you with more data on profitability stats, but I can only comment on what’s publicly available through DailyFX studies and FXCM’s quarterly reports to our regulators. The table Joules posted shows data from one of those quarterly reports last year.

What’s interesting is how even the data from other brokers seems to support the conclusions of the DailyFX studies on traders at FXCM, namely that accounts with higher balances tend to use less leverage and therefore perform better. That could explain why the two brokers with the highest profitability percentage happen to be the ones with highest account opening minimum ($10,000). However, this is only a partial picture, since we don’t know the average account size at all these brokers.

In the end, the biggest factor determining whether a trader is profitable or not is the strategy they use. A trader's results will be due to their own trading decisions on when to buy and sell. DailyFX research has found that retail traders often try to pick tops and bottoms, rather than trade with the trend. That is why the Speculative Sentiment Index (SSI), which I discuss extensively in our signals thread, can be used as a contrarian indicator.

ssi_gbp-usd_body_GBPUSDSSI.png

When SSI is positive, that means retail traders are net long the currency pair, which is a bearish signal. On the other hand, a negative SSI means traders are shorting the pair overall, which is a bullish signal.
 
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barjon

Legendary member
10,705 1,809
Hi John,
If you plotted this on a chart it would be a straight descending line which, in effect, hits zero eventually. So, either all traders blow up eventually, or the line flattens out at some point to allow the elite handful to make consistent gains indefinitely. If it doesn't flatten out, then this would support the theory promulgated by some former members that traders simply get lucky and mistake their good fortune for real skill. The more their luck continues (i.e. Q4 taders and beyond), the more inclined they are to believe that's it's their trading skill that accounts for their success. Ultimately though, they're doomed to fail.

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.

That's not necessarily so, Tim. A trader may drop out of the figures because he has a losing quarter (who hasn't :)) only to get back on his merry way the next quarter. Anyway what good is "positive expectancy" - that's all very nice but I guess someone doing for their only source of income is more worried about whether they are making enough to put bread on the table rather than just finishing up with a + sign every quarter.

As for luck, well that's something of a red herring in my view since you can define it in so many ways. For example, if people who have consistent, but short term, success have worked out a strategy that happens to suit the prevailing market conditions is that "lucky" - by one way of looking at it, yes. By another, no.
 

Babyblush

Active member
132 4
Traders fail because they are not intellectual enough while trading in the forex market and are entrapped with the wrong trades because of their emotions.
 

VielGeld

Experienced member
1,421 179
@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?

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.

But that said, some really good info has been posted for once. Thanks for that, Jason (despite *cough* promoting a few institutions, but I suppose I can overlook it for once). :)
 
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Purple Brain

Experienced member
1,613 179
No offense taken, PB :D
Delighted to hear that.

If I could, I would provide you with more data on profitability stats, but I can only comment on what’s publicly available
I quite understand your predicament. But as I suggested to another member yesterday, even if every broker were required by law to state “98% of you will lose some or all of your money” it would have little effect. I am almost certain the majority of the 98% would imagine themselves to be part of the elite 2%. I know I do, in spite of significant empirical evidence to the contrary.

What’s interesting is how even the data from other brokers seems to support the conclusions of the DailyFX studies on traders at FXCM, namely that accounts with higher balances tend to use less leverage and therefore perform better. That could explain why the two brokers with the highest profitability percentage happen to be the ones with highest account opening minimum ($10,000).
That could also be an indication that those with more money are already successful traders or possibly even financial institutions who use brokers for hedging/arbing.

I thought I understood leverage/gearing and how that can hurt, but I’m not sure I do. I get 1:50 leverage on most FX pairs from OANDA, 1:20 on others. It wouldn’t matter if I got 1:100 or 1:1000, I’m still only going to risk the same fixed percentage of my trading capital on any one trade. Is it only if the individual trader uses leverage to risk more than a sensible fraction of their account on any one trade that leveraging is considered the culprit rather the traders stupidity?
 

Rhody Trader

Senior member
2,620 266
@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

Experienced member
1,613 179
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

Experienced member
1,421 179
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.
 
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Liquid validity

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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

Experienced member
1,421 179
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. :)
 
 
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