There is an often-mentioned grim statistic out there that 95% of all traders, including all forex traders, lose.

What are the sources of this grim statistic? There is a writer named marketstudent who briefly explores any evidence to support or disprove the claim that 95% of all traders lose in an nicely researched article called Do 95% of all traders lose? Marketstudent looks at three sources:

  1. “The profitability of day traders”, an article written by Douglas J. Jordan and J. David Diltz and published in the Financial Analysts Journal (Vol.59,No6, Nov-Dec 2003), using a sample of U.S day traders: results show twice as many day traders lose money as make money, and only 20% were more than marginally profitable.
  2. “The Cross-Section of Speculator Skill: Evidence from Taiwan,” a research paper by Barber, Lee, Liu and Odean and published on the Social Science Research Network (Feb 14, 2011), using data from the Taiwanese Stock Exchange of day trader performance over 15 year period 1992-2006: results show that while  about 13% earn profits net of fees in the typical year, 1% of day traders (1,000 of 360,000) are able to outperform consistently
  3. Due to U.S. Commodity Futures Trading Commission Regulations, US forex brokers are now also forced to disclose the percentage of active forex accounts that are actually profitable, and Michael Greenburg of Forex Magnates has compiled the for different quarters and presented them in an easy to read chart like the one below:

 

 Q1 2011  Change from Q4
Symbol %Profit %Loss Total Accounts %Profit Accounts
GFT 39.9% 60.1% 9,873 8% -5
Oanda 38.1% 61.9% 29,255 4% 1,522
FXDD 30.0% 70.0% 7,076 -2% -817
Alpari 30.0% 70.0% 1,648 0% 101
Interbank FX 30.0% 70.0% 12,988 2% -681
PFG 29.5% 70.5% 2,152 8% 361
Gain Capital 29.0% 71.0% 13,937 1% -691
FXCM 27.0% 73.0% 20,223 4% 1861
MB Trading 26.1% 73.9% 4,586 0% 108
FX Solutions 26.0% 74.0% 4,781 -1% -700
FX Club 23.5% 76.5% 2,034 5% -431
Advanced Markets 16.0% 84.0% 50 -6% -8
Average change 2%
Total change 620
Total number of account in the US 108,603

From what is gathered in the chart above, the most successful FX brokerages (GFT and Oanda) are showing that 60% of forex traders lose money, though the average for the 108,603 accounts is closer to 70%. However, it is important to note that the above data only includes “active” accounts, which is problematic because we have no idea how many new accounts blew up in their first few months of forex trading and subsequently became inactive (and thus were omitted). No doubt if you factored in the blown up accounts, and tracked profitable accounts for more than one quarter, you would have the losing percentages increase.

While the previous two research articles suggest at the most conservative that 87% of day traders lose money, there has not been an article to date that has analyzed the results of forex day traders. It would probably be safe to say that forex day traders would probably lose in the region of 87% as well. According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) “Even people running the trading shops warn clients against trying to time the market. ‘If 15% of day traders are profitable,’ says Drew Niv, chief executive of FXCM, ‘I’d be surprised’.

What is interesting is the question: why do 70-95% of forex traders fail when there is a 50% chance of winning a trade?

We believe there are 10 reasons for failure:

  1. Odds are Against you Due to Transaction Costs
  2. Competition is Vastly Superior and More Sophisticated
  3. False Expectations (Instant Success, Incredible Returns, Holy Grail)
  4. Over-leverage
  5. Over trading
  6. Lack of Knowledge
  7. Lack of Experience
  8. Human Weakness (Greed, Fear, Ego etc.)
  9. No Trading Plan or System
  10. Unsustainable or Flawed Money Management.

 

1. Odds are Stacked Against you Due to Transaction Costs

At the onset of every trade, you are in the hole due to the spread or commission, and you have to work hard to get yourself to break-even or profit. The retail trader always pays the Bid/ask spread, which makes his odds of winning considerably less than that of a “fair game” and he may incur additional charges from commission (with some ECN brokers) or the overnight interest of keeping his position open for more than one day. This trading cost makes the odds of winning considerably less than 50%, or flipping a coin. It should be noted that brokers and banks generally grant considerably tighter spreads to the larger clients, which gives them a cost advantage we do not have.

Moreover, in forex day trading, because forex vacillates up and down, you have to be more or less correct on the entry and the exit, which is tantamount to having to guess right twice in a row if comparing the odds to a coin toss. Luck will not win in forex.

Forex review group Remedy

If the spread and commission are your trading handicaps, you should be on the lookout for brokers that offer the lowest spreads and/or commissions.

If you are forex day trading, and thus aware that you have to be more than 50% accurate on the entry and the exit of a quickly vacillating market, you cannot rely on any subjective sense of your system’s profitability or your own best guess. Instead, you have to make an extra effort that your system has been back tested and forward tested over a sufficient amount of quantifiable data and that it has been shown to have a high probability of success. There is no room for subjectivity and luck.

 

2. Competition is Vastly Superior and More Sophisticated

In our article on Who Trades FX, we illustrated how we the retail traders still only comprise 2% of the whole FX market volume, and being the lowest on the food chain in terms of size and sophistication, we are the most readily eaten up. The larger traders (the banks, corporations and hedge funds) are the sharks in these waters, trading day and night, knowing the ins and outs of the market, and they eat the weak. They employ sophisticated trading systems that sniff out the unsophisticated traders who are more likely to put stop orders at obvious levels of support and resistance. Some brokers publish their in-house ratios of longs to shorts on any given currency on any given time, called sentiment, and since they know that most retail traders lose, the recommendation is to trade counter to the retail sentiment or directional bias.

In the big picture, then, the retail forex trader is not pitting his wits against other retail traders that only comprise 2% of the liquidity. Instead, he is pitting his wits against the institutional traders working for the banks and hedge funds that comprise 90% of the liquidity. In such a situation, the playing field is not fair. The typical retail trader has limited trading capital, is often inexperienced, trades with free online tools, and can only spend a fraction of his time trading the market. The typical institutional trader, in contrast, is well capitalized, has considerable experience, more sophisticated trading tools, and can devote most of his day to trading the market. Having more capital, more sophisticated trading tools, more experience and education, and more focused trading time, the institutional traders are like the sharks in the fish tank preying on the weaker and smaller retail traders whose accounts are swallowed up by their own trading mistakes.

Forex review group Remedy

Being aware that you are competing against opponents larger and more sophisticated than you is a humbling step in the right direction. To know beforehand that you are at a serious disadvantage in terms of experience, education, tools and time, compared to your institutional trader fighting against you for each slice of the pie should be motivation for you to try to gain the necessary experience, education and tools to compete on a more equal playing field.

 

3. False Expectations

False expectations can be broken down to: looking to get rich quick, achieve incredible monthly returns, and rely on the “holy grail” system to get you there.

 Looking to Achieve Instant Success

Forex has gained a reputation as the ultimate “Get Rich Quick” scheme. This hype is perpetrated by numerous entities (system vendors, signal providers, seminar or chat room gurus, even forex dealers and brokers) all trying to make money out of naivety and greed. They all propagate the idea that one can get extremely rich trading forex, that you can retire wealthy within a short period of time, or that you can quit your job to trade forex for a living.

Forex review group Remedy

Bear in mind that success in forex does not happen overnight. It may take years for you to be able to gain the confidence and the experience, as well as the insight, to be able to turn forex trading into a successful occupation.

If you are a new trader, you first have to survive the trading game. You have to try not to lose all your money in paper trading or even a real money account in the first few months to a year. Once you are finding that you are not losing and that instead you are winning in your demo and real accounts after several months, then may consider yourself as having a chance to make this into a profitable second career. Please do not give up your first career.

 

 Looking to Achieve Incredible Returns

If you are a new trader expecting to make 20-100% of your initial trading account per month, you have already an improbable goal that is detached from reality and unworkable. The only way to make such huge profits is to use high leverage or trade multiple times per day, both approaches of which may work for you for a short while but will eventually destroy your account. You will enter into the double dangers of over-leverage and over-trading, as discussed below.

I once met a gentleman on a plane who said that he was going to make a living from being a forex trader on an account of $6000. He was simply naive. To survive in this world a person generally needs to make 2K per month, more if raising a family, and that bread and butter money is best earned from a job or business. To think that you can make 2K per month from your initial $6000 is to think that you can consistently earn 30% per month, which is improbable. Forex is just too dangerous an arena, and to try to accelerate your trading (over-leveraging and over-trading) to achieve a 30% per monthly return so that you can pay your bills is a quick recipe for disaster.

Forex review group Remedy

Stop thinking you can build a fortune from your slim trading account, or that you can quit your day job because you can earn your living trading forex.  No human or system can consistently make the 20-100% per month necessary for you to retire in one year or live off your monthly earnings. Forex is not a get rich quick scheme.

It is possible, however, for a human or system to achieve consistently profitable returns in the order of 1-10% per month. It is possible but very difficult. To do so requires forex education, experience, patience, discipline, and a cutting edge system.  The difficulty is being consistent about trading while maintaining a low level of leverage and risk.

 

Looking for the Holy Grail

Most people new and old to forex are looking for the best trading system around. I sympathize with the quest for the Holy Grail. I have been a seeker and to some degree I still am. I have long held the optimistic believe that somewhere out “there” someone has built the system that can beat the system. I knew there was a lot of crap out there, but if I can search far enough or dig deep enough on the net, I can find that “holy grail” system that others could not find and use it to build my fortune.

The problem is that 95% of systems are unprofitable for numerous reasons, and the great system of today can be in the waste bin tomorrow. Markets change and the system making steady profit in the last six months can suddenly find itself in a heavy, unexpected draw down. I have seen this happen with the best of scalping systems, for instance. Many of the best had made great returns during the Asian session for two straight years, returns consistent with their 10 year back tests, and then in 2011 I have seen them blow up. The historically range-bound period of the Asian session suddenly became a trending session and the counter-trend scalping trades initiated by the scalping EAs backfired on the accounts.

Razor Remedy

Stop hinging your dreams of fortune on any one system. There is no “holy grail” system that can beat the market. I am not saying that good systems are not out there. There are some good systems that be demonstrated to be profitable in back-testing and forward testing, if used wisely and modestly. They are definitely not going to make you 20-100% per month, and if they claim to do so, you should have your doubts about the system. Instead, the really good systems can be shown to produce 1-10% per month consistent returns with less than 20% draw down.

Put your priority in educating yourself about forex, and trading on your own without a black box system. The more you know about forex and what works and what does not, the better you will become in distinguishing what makes a good system, for you to invent or to find.

 

4. Over-Leverage.

A foremost reason for why many forex traders fail is that they are over-leveraged in their trades. Or put another way, they are under-capitalized in relation to the size of the trades they make. With the false expectation that they can make 20-100% monthly returns, the new trader maxes out on the available leverage, quickly blowing up his account. The forex market allows traders to leverage their accounts as much as 400:1, which if fully used can lead to massive trading gains in some few cases, and crippling losses in most others.

Even with the more common 100:1 leverage offered by most forex brokers, if the trader were to fully use the 100:1 leverage offered, his entire account can be wiped out in one trade. If the trader had a mini account of $1000, for instance, and used the 100:1 leverage to buy 1 standard ($100,000) lot, the currency pair would only have to travel against him by 100 pips before he was totally wiped out (100 pips X $10 per pip=$1000). The trader was trying to carry too big a position with too little money.

It is interesting that US regulators recently took the extra step to limit the leverage of US brokerage firms to 50:1. They did so with the stated objective of trying to protect the retail investor from hurting himself. But limiting the capacity of leverage will not protect a US client from abusing leverage and destroying his account. A greedy US client can still blow up his account if he were to use the full 50:1 leverage offered: the only difference being that he can only control half the lot size as he did under the 100:1 leverage, and thus it will take him 2 bad trades of -100 pips instead of 1 bad trade of -100 pips to completely wipe out his account.

Forex review group Remedy

The market allows traders to use vast amounts of risk, but in many cases it is in the trader’s best interest to limit the amount of leverage used. One should trade how a professional would use leverage. Most professional traders use about 2:1 leverage by trading one standard lot ($100,000) for every $50,000 in their trading accounts. This coincides with one micro lot ($1000) for every $500 of account value. Thus, if you had a $2000 account, you would trade up to 4 micro lots per trade or less than that.

Remember that trade leverage can be a powerful tool to maximize your returns, or it can be your downfall. Leverage is a double-edged sword that amplifies the downside as much as it adds to the potential gains. Use it wisely and sparingly.

 

5. Over-Trading.

The new forex trader thinks that if he can couple the use of high leverage with frequent trading, he can make huge profits. What he does not notice is that the forex market is volatile and changes direction all day long, and it is impossible to expect profitable trades from every price movement. There is a reason why researchers have noticed that up to 90% of day traders fail: the day traders are exposing their accounts to more risk and reducing their win loss ratio. They are taking too many trades of short duration, trying to trade each change of direction on a small time frame scale, and often get chopped up in the process. They are also increasing their cost of trading as each time they trade they are paying the spread or commission.

There are various reasons that forex traders over-trade, such as excitement of trading, revenge trading to make up for past losses, missing a forex trade and then chasing the market, etc. Ultimately, overtrading is the result of having no discipline, no plan and no patience.

Forex review group Remedy

You should strive to adhere to a trading plan / system and then muster the discipline and patience to carry it out. The plan and system will force you to trade under a set of rules of entry and exit. You should curb your excitement and adrenaline in trading for each change in direction and place trades only when they are required by the system. If you had a bad losing week, don’t worry, the worst thing you can do is abandon money management principles and try to over-leverage or over-trade your account back to health. Moreover, if you missed one trade or trend, you don’t need to chase it; you just need to wait patiently for a retracement to get back in. Follow the rules of the system or plan, not the micro vacillations of the market.

 

6. Lack of Knowledge.

One of the reasons forex traders fail is because they don’t have the enough education. They come into trading without even opening a forex book or educating themselves about currency trading. Some forex traders barely understand what technical and fundamental analysis is, and they execute trades on whim, intuition, gut instinct, the market moving sharply in one direction or the news of the day suggesting the direction in hindsight. Consequently, without knowledge of how/why prices move, many traders fail.

Forex review group Remedy

A new forex trader should strive to know the main components that constitute the market, as well as the main factors that drive it. There is a lot to learn. One should try to learn and be fluent in the research and analysis of both technical and fundamental factors shaping the market. It is not enough to follow just one school or approach. You have to be curious and open-minded enough to explore a multitude of factors and indicators that shape and plot the market. Our own online school is here fo you to learn for free. In addition, you can search Google and visit niche forums and social networks for you to learn more about topics you are interested in, and for you to participate in online discussions. Everything you need to know about forex is out there on the net, and it is up to you to learn and explore all you can. The more knowledge and information you obtain, the better ideas you will have about this market, which in turn will help you make wiser and more balanced decisions about it.

It is also not enough that you have a theoretical knowledge of Forex. You have to put it in practice and develop experience.

 

7. Lack of Experience

Often new traders become so fascinated by an indicator or system that they dive right into real trading with it in the hopes of getting rich quicker. The allure of quick profits prevents them from waiting patiently and practicing first with demo accounts and micro accounts. Or perhaps they already practiced with a demo account for a couple months, made some decent trades, and have convinced themselves that they or their system is capable of beating the market. Then they try their hand at a real account, and discover that greed and fear interfere with their trading, and that the market of tomorrow bears little resemblance to the market of the last few months.

Their lack of experience as traders makes them undisciplined, impatient and emotional, causing numerous trading mistakes. Their lack of experience with the multiplicity of forces affecting the markets, as well as its high degree of randomness, causes them to underestimate and overestimate the market, causing numerous false interpretations of market direction. Their lack of experience with money management causes them to risk too much on each mistaken trade and they eventually get wiped out.

Forex review group Remedy

It is best to imagine the forex market as a highly dangerous arena that takes years of experience to survive, let alone profit from. While two months may be enough time to learn how to drive a car, it might take years of sweat and blood and failure to learn how to survive crashing your trading account. It may take many more years after that to learn how to fully master yourself and the markets so that you can consistently profit from it. Bear in mind that the professional trader on the other side of the trade has often 5 more years of full time experience trading the market, and works with an equally experienced team of traders with cutting edge tools at their disposal. If you compare this scenario to a Wild West gunfight, you are the citizen with an old pistol sauntering into the street to brazenly dual with a dozen veteran gunslingers armed with an assortment of pistols, rifles and Gatling guns. If you don’t have the requisite experience, you will be cut down before you have a chance to blink.

The fact is that every trader must work hard all the time to become better with time. In his recent book “Outliers” Malcolm Gladwell describes the 10,000-Hour Rule, claiming that the key to success in any cognitive field is to a large extent a matter of practicing a specific task for a total of 10,000 hours, which equates to 4 hours a day for 10 years. To be good at forex does not necessarily depend on that much screen time and experience, but one should remember that like many other focused and technical endeavors, it takes a lot of time to develop and hone the skill set. Forex is a long journey that requires patience, discipline, self-control, bravery, and a strong motivation to keep doing one’s daily homework, trading regularly and consistently, and learning all the time.

 

8. Human Weakness Of Traders

Human traders have a number of weaknesses, the foremost being Greed, Fear, Ego, Addiction, and Laziness.

Greed: One of the seven deadly sins, it is the main cause why traders lose in forex. Because of our short lifespan and eagerness to make money fast, greed leads us to trade without first taking the time to build up the requisite knowledge and experience of the markets. Greed forces us into the market too soon when we are unready. Greed also makes us more aggressive, causing us to over-trade or over-leverage, which in turn causes us to trade our account into oblivion.

Fear: Healthy fear is to know that the markets are dangerous and that we first need the requisite skills and training to survive in them. Unhealthy fear is to think that the market is so dangerous that it is paralyzing for us to initiate trades, causing us to watch the market action without being part of it. Unhealthy fear is also when a trader puts in a big order because of greed, and then when the market moves against him, he cuts the trade at a loss too early, fearing a bigger loss yet never allowing the trade room to breathe. Or if the market moves in his direction, he closes the trade too fast with small profits, fearing that the market might move against him yet never allowing the trade room to mature.

Ego: Ego is when any amount of knowledge or experience goes to inflate the head into thinking it knows enough or all there is to know. Many traders lose because they don’t have the remotest idea of what they are doing when at the same time they think they really know. If their ego is big enough and they keep on trading the markets and losing, they may even think that their “experience” qualifies them to write books, create seminars and become “gurus” to those newbies naive enough to trust in their confidence.

The fact is each trade puts one’s forex knowledge and experience under a direct test in the market. Just when you think you know enough, the market will force you to reconsider, go back to the drawing board and to learn some more. It is best to be a humble trader, manage your trading in a modest way, and be prepared to learn new things every day and with every trade. One should be prepared for the worst and to learn the most from one’s failures. Too much ego creates perpetual states of illusion and denial and stops the learning process.

Addiction: You know you are a “Trade-aholic” or “Forex-aholic” when you watch charts all day without a break, when you trade with vengeance when you lose, when you are unable to accept a loss keeping losing trades open for days and weeks or adding more money to your account (and even adding to the losing trades) in the hope that it will switch direction. You must remember that trading is not a betting game to make money fast. It is a business to make money slowly and you must put in the time and effort to become a good trader.

Laziness: Most people never use the full potential of their brains. Our brains are more powerful than the most powerful of computers, but it requires work and motivation to flip them on. It is too easy for us to glide through life at low brain output, living in the illusions of the past or future, but unable to fully compute the present and question everything around us. Lazy traders hardly ever do their homework before trading, to research the right setup and the important news of the day, and never do their homework after trading, to analyze their past trades and learn from their mistakes. Instead their trades are begotten from luck, they end up failing, and there is nothing learned from their trading errors. After failing all the time, they then put all their hopes in a trading robot to trade for them, without putting in the massive effort and testing it takes to distinguish the few good robots from the majority of bad ones.

Forex review group Remedy

The only way to overcome the human limitations above is to acknowledge their existence and work hard to avoid them. To that end, one must strive to develop a solid trading plan and system (see below) that forces the trader to be patient, calculating and free from emotions and ego that affect your ability to trade.

 

9. No Trading Plan or Trading System

Many traders trade without a plan or system. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they second guess it and don’t stick with it, particularly if the trade is a loss. Consequently they overtrade and use their equity to the limit (are under-capitalized), which puts them in a squeeze and forces them to liquidate positions. To trade without a trading plan is to be subject to all the human limitations covered above.

Not following a disciplined trading plan or system leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken. They allow emotions to overcome intelligence when markets are going for or against them. They do not have a plan to follow. A good plan must include defense points (stops).

Forex review group Remedy

You need a good trading plan that gives you a definite trading system with defined rules for you to follow for every trade. The system has to be clear and defined without being rigid and inflexible. It should have preconditions for entering a trade, determining lot size, and exiting a trade. A good trading plan will turn a human trader into more of a trading robot, trading by a set of rules and conditions without the twin emotions of greed and feed, interpretive bias, ego, addiction, laziness of mind and body, and limitation of time and attention. Tailor your plan to yourself. Every trader is unique and requires a different set of approaches to trading. Some few traders succeed in scalping, but it does not mean it is suitable for you. It is your responsibility to figure out what kind of trader you are.

However, a good trading plan will take a considerable amount of time, discipline and patience to adhere to in the way it was intended. In the end, for many reasons, the human trader sometimes cannot stick to the trading plan. If you know you cannot stick with a trading plan for whatever reason, your best bet would be to seek out a good robot that can enter and exit trades with predetermined lot sizes under predefined logical conditions 24-7 without emotion. If you can program or learn how to program in MetaTrader language, you are even better off, because you can then create the robot that becomes the best substitute for yourself and your ideas about the market.

Also do not make the mistake of jumping from one system to another. Once you decide on a trading system, you should stick with it through the losses. Every strategy in the world experiences losses. When you experience a string of losses, your first thought might be to abandon it and seek a new one, when you should instead continue trading it; even it is through a demo account without risk. You could always explore your other options in other demo accounts.

 

10. Unsustainable or Flawed Money Management

Most forex traders totally forget about the risk of forex trading, thinking only about the win and never planning for the worst. Yet the worst does transpire more than one thinks. Trading without safeguards can be like skydiving without a parachute. Every trade has the potential to sharply turn against you and do so for any amount of time and for any amount of pips. If one is trading with high leverage and without stops, one has no money management in place and is instead vulnerable to having that one trade turn into a nightmare that blows up the account. No amount of praying or hoping or luck or patience can force a bad trade to move back in your favor. They don’t take the small loses and instead stick with the loser until it really hurts, then take the loss. This is an undisciplined approach and a trader needs to stick with a system with a clearly defined stop loss.

Even worse than having no stops, is adding to a losing position via grids and martingales. Some traders compound the problem of trading without a stop loss by adding to their losing trades, either adding the same lot size at different intervals (gridding) or adding a multiple of the initial lot size at different intervals (martingale). While these strategies can sometimes turn bad trades around in one’s favor, they can also accelerate the speed of the blowup if the adverse trade is strong enough.

Money management limits the risk on every single trade so that you are able to trade tomorrow, the next week, months and years in the future. The purpose of money management is to protect you from risking too much and therefore grow your profits in a stable, consistent manner. Without proper money management technique, you can empty your trading account within a few clumsy trades.

Forex review group Remedy

Serious traders incorporate money management techniques to protect their portfolio. They have safeguards in place to protect their account in order to remain in business longer. Some key risk management techniques are:

1) Only trade with risk capital you can afford to lose, money that is expendable and not needed for basic essentials of living.

2) Avoid using too Much Leverage. Forex brokers offer leverage ratios from 50:1 to as high as 500:1. These represent the maximum amount of leverage offered but you can choose any amount of leverage below the maximum. In fact, it is recommended to never trade more than 2:1 leverage on any given trade in order to survive the losing trades. Using more than this leverage on any one trade can deplete your account after a few sharp adverse moves.

3) Cut Losses short, let Profits run. You should use clearly defined stop losses to limit a losing trade; otherwise you are vulnerable to having any trade drain your account. Losing is not the end of the world, and you should be suspicious of any system that strives to be accurate to a degree greater than 90%. It is doing so at the expense of no stops or stops too far away and either approach can quickly empty an account. Moreover, you should give your winning trade room to breathe. Do not cut it off too soon. It is the large wins that make up for all the losses.

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