85-95% of traders fail
Let it sink in for a moment…
That is a sad mirror image of the trading community… isn’t it?
Ever wondered if these stats are true or false? Perhaps it is it just a slogan marketers invented and use to sell you stuff that you don’t really need?
Although the purpose of this blog post is to share with you actual changes I’ve made in order to turn from a losing trader to a successful one, I would like to start with testing the validity of the 85-95% failure rate claim.
How do you measure success?
When you try to validate (or disprove) the 85-95% failure rate you soon recognize that you first have to address these two problems:
- The definition of “Success” or “Failure” in trading is time dependent. You can be successful for a month but a failure when you are measured on a yearly basis (or even a longer period of time)
- Access to data – It is hard to find statistical data that show traders performance. Brokers aren’t willingly sharing this information.
To solve the first problem you need to define success based on a reasonable period of time.
In my personal view, the minimum time to measure success is at least one year.
That means that if you see someone that for a whole year has been consistent, you can assume that he/she is a good trader.
As per the second problem (the statistics), it is starting to get easier access to data thanks to new regulations forcing brokers to reveal numbers of active traders.
And the result is…
A blog post by the Forex Guy tried to also investigate this 85-95% statement (see here). The post presented some very interesting evidence:
“Using data from the Taiwanese Stock Exchange, the performance of day traders over the 15 year period 1992-2006 was evaluated…
In the average year, 360,000 individuals engage in day trading. While about 13% earn profits net of fees in the typical year, the results of our analysis suggest that less than 2% of day traders (1,000 out of 360,000) are able to outperform consistently.”
According to this 14 years study, only 2% outperform consistently (!!) – That’s a very grim number, you must agree.
Perhaps it is just the Taiwanese traders?
What about the U.S?
As mentioned above, thanks to new CFTC regulations, U.S Forex and Futures brokers are now forced to disclose the percentage of active accounts that are actually profitable.
Michael Greenberg from Forex Magnets compiled the data for the first quarter of 2011:
The data above shows that during the first quarter of 2011 25% of the accounts (reported by the listed brokers above) were profitable.
This data improves the grim picture received from the Taiwanese study but you have to consider two things:
- This data represents the accounts performance during 1 quarter only. It doesn’t meet the yearly criteria that I mentioned above and definitely far from the 15 years long Taiwanese study.
- This data doesn’t reflect accounts growth over time – It just shows that the account is up from the previous quarter.
Conclusion – True or not?
Based on my research, other studies published throughout the years show the same picture about the success (or failure) rate of traders.
The truth is that whether it is 95% or 85%, or slightly lower than that, it doesn’t really matter. The bottom line is that most traders fail to generate consistent positive performance in the FX and Equities markets.
Now the question is WHY?
Insanity or change
Einstein said that the definition of Insanity is doing the same thing over and over again and expecting different results.
According to this definition, we can probably declare that most traders are Insane – They repeat the same mistakes…over and over and over again.
Just like most traders, I was also stuck in the boom and bust cycle in my early years of trading.
My trading pattern was simple:
I used to study and learn about technical analysis and the financial markets. That was always how I started.
Once I was finished with learning, I funded my live account and started to trade again.
Now since I was (and still am) a pretty good student, my learning process showed its fruits and I started to win and accumulate gains.
I was pumped.
My confidence rose…and greed.
I increased leverage to make sure that I’m “utilizing” on my positive momentum….
And then I lost. Much more than I gained.
Most traders you know out there (probably also you, that read this post right now) are spending the majority of their trading careers (short or long) repeating the same, or a similar pattern. Staying inside the Boom and Bust cycle till they find a way out, or till they get thrown out (with no money left to trade).
I had to make a decision… and I’ve made one – I either stop this insanity or stop trading.
A change was coming
I decided to make a change but I had to know what is it the I need to change?
I had to map out the things that prevented me from reaching my trading goals.
Here are the 4 main changes I’ve made in order to break out of the boom and bust cycle.
First change – Trade higher time frames
The first trading flaw that I recognized was that I was too focused on short term price fluctuations.
You see…Trading short time frames isn’t made for everyone. It involves high risk, it is intense and it requires a high level of engagement – You need to be online, trade frequently and monitor the markets… all the time. Although it can be profitable for some, I knew, from the early days of my trading, that scalping wasn’t made for me.
Side mark: In my opinion, discretionary short term trading is doomed to fail in these days of Algo Trading. Short term volatility has increased, volume has decreased and you can’t compete with the robots.
My trading style involved analysis and set ups that were based on hourly and 240 minutes charts but still, I’ve found myself drawn into those 5 minutes and 1 minute charts looking for my trade entries.
My desire to use the tightest stop loss that I can.
Obviously, that mistake was related to a psychological and emotional element – FEAR.
I was afraid of losing.
Instead of trading my set ups, I tried to locate and trade smaller patterns inside my entry zones. I was looking for 1-5 minutes bullish/bearish confirmation signals inside technical Price Zones that were based on 240 minutes and daily charts.
That was ridicules!
The result of my actions was that I got burned (stopped out) so many times by trading these low time frames patterns, that by the time that the price actually started to move in the desired direction I wasn’t in the trade.
I exceeded my pain threshold level and stayed out.
In most of the times I was right with my analysis, but I still I kept losing money.
I had to change this flawed behavior.
The change that I’ve made was to zoom out to daily and even weekly time frames with my analysis.
That change allowed me to focus on the bigger picture, understand the major trends and be familiar with higher time frames levels and patterns that are generating major daily swings.
Another advantage of this “zoom out” change was that it kept my focus on high probability trades that I felt more comfortable trading.
If you trade a financial asset that its price is testing the 200 weeks MA line (like we see these days in USDCHF), you know, technically, that there’s a high chance that the price will react to this Moving Average line…After all, it has done so many times in the past.
I’m sure that you will agree with me that relying on a technical element like the 200 weeks MA line is much better than relying on an hourly MA line or any other intra-day level or pattern.
By zooming out to higher time frame I’ve started to feel more comfortable with my set ups.
I was more confident and that allowed me to use wider stop loss and let the trades work.
Even If I still wanted to fine tune my entry and use tighter stop loss than those that the daily charts require, I zoomed into the hourly/240 minutes chart to find patterns – Clearly that a much more reliable time frame than the 1, 5, or 15 minutes time frames.
Zooming out and trading higher time frames allowed me to be more disciplined and trade my plan without (or with less) emotional interference.
Second change – Position size
In order to execute the first change I had to adjust my position size.
If in order to trade the hourly time frame I had to risk 10-20 pips on a trade, after the change I had to risk 40,50 and sometimes even more than 100 pips on a trade.
That can’t (and shouldn’t) be done without reducing the position sizes accordingly.
By reducing my position size I’ve gained two benefits:
- I was able to hold on to the trade when the price moves against me. I allowed the trades to work.
- I’ve learned the advantages of scaling
Scaling allows you to gradually increase your position size based on price action.
The principle is that you start with a relatively small position size and increase it as the price moves. This approach, if being done correctly, allows you to fully, and better exploit your correct read of the market.
Instead of starting with a large position and feeling the full psychological impact right from the start, you start small and add positions when you get technical confirmation signals that increase your confidence in your setup.
How many times did you find yourself pressing that Buy/Sell button and see the price immediately turns against you? Pretty often right?
Now think that instead of feeling the pain of a full-size position working against you, you feel it on half/third of your regular position size? Wouldn’t it feel better? Wouldn’t it allow you to hold the trade, stick to your trading plan and not exit too soon (like so many traders I work with do!)?
Now although some of you may know, or have learned to accept risk, it isn’t the case for the majority of traders that I’ve worked with.
The truth is that the majority of traders think (or expect) that when they get into a trade, it will immediately start to generate profit. When that doesn’t happen they start to have doubts, second thoughts about their setup… and they close the trades too early.
I’ve been there, I know.
Reducing position size and using the scaling technique help you to better handle your trade. You may earn a little less on your winners at first, but for sure, you will better control your emotions and trade like the pros.
Third change – Confluence and Price Zones
The two changes above are more trading psychology related – The ability to leave your emotions out of trading by choosing better setups (high time frames) and reducing position size (controlling risk)
The third change was technical – I’ve started to work with confluence and Price Zones.
The evolution of Price Zones
When I started to trade I learned and knew the basics – Classic Candlesticks patterns, support and resistance lines and basic trends analysis.
It didn’t take me too long to understand that it isn’t enough.
I further explored the endless world of technical analysis – The trading systems and strategies that were commonly used in the markets.
In fact, I knew so much about technical analysis that in one case I signed up for a paid online course about Fibonacci Trading, only to be told by the trainer that I had already knew all that he was teaching about Fibs… and I got a full refund on this course.
But… despite all of this knowledge, I wasn’t able to pick winning trades.
I was trading levels that the markets easily broke, I was spiked and thrown out of trades and I was losing money… a lot!
The technical knowledge I had wasn’t translated to money.
But it didn’t go to waste.
I’ve found out that if I use the different techniques that I’ve learned on one chart I can find relatively tight price ranges that combine multiple patterns and reversal levels.
I call these ranges, Price Zones – Technical Confluence Zones that I can trade and even rank based on their strength.
The rule is simple – The higher the rank, the better the set up is.
Here’s an example:
AUDUSD’s chart above shows a Buy Zone that I’ve recently shared with my Elite Zone members – 0.73-0.74.
This 100 pips wide Price Zone (actually it was a little bit less than 100 pips) included the following technical supporting elements:
- Structure – Clear support between 0.73 and 0.74 based on this daily chart.
- Daily uptrend line.
- 8 Fibonacci level – Classic Fib level to end a retracement (read more)
- Daily double bottom
As you can see, this powerful Price Zone (or Buy Zone if you wish) generated a 300 pips move in just a few weeks.
The same chart provides another example of a different daily Price Zone – This time a Sell Zone:
Between 0.77 and 0.775 AUDUSD was facing a weekly structure (red rectangle) and the PRZ (Potential Reversal Zone) of a bearish Bat pattern (read more).
The bearish setup mentioned above (Sell Zone near 0.77) was weaker than the bullish one that AUDUSD presented near 0.73-0.74. Therefore it was ranked as less powerful setup.
Despite the fact that it was ranked lower, the bearish setup on AUDUSD still generated almost 150 pips profit on a 50 pips risk, which makes it a very good setup.
Fourth change – Write a journal
I’m sure you’ve heard this advice before… as sure as I know that most of you do not implement it.
A journal allows you to document everything that has to do with your trading:
- The number of trades that you took
- The days/hours of your trades
- Your position size
- The technical setup you had
- Your emotions (confidence\fear\hesitations\greed)
- Your discipline level (follow\didn’t follow the trading plan)
- After thoughts…
These are just few basic examples of what your journal should include.
The more details you’ll add to your journal, the more useful it will be.
The power of journaling is that it allows you to face the truth about your trading.
If you will do it properly you will know if you tend to take profits too early for example.
You will know if your emotions influence your trading.
You will know which setup you feel more comfortable with.
You’ll learn a lot about yourself… and about your trading performance.
If you’ll design your journal properly it can also allows you to monitor your trading performance:
- Specific days\hours that generate better results for you.
- Specific set ups that are more successful than others
- Specific actions that you need to take to avoid emotional trading (perhaps you should leave the screens to avoid messing with your trades)
- Adjusting your trade management and risk management rules to improve performance.
As you can see, there are many advantages for writing a trading journal.
Most people don’t do it because they are too lazy or, subconsciously, they prefer to avoid the truth about their trading and why they constantly fail.
There’s no right or wrong approach to trading.
Despite what people may try to sell to you, there’s no “one rule fits all” formula that will turn you instantly from a “boom and bust” trader to a successful one.
It’s a journey and it is your journey.
Only you know what’s best for you.
As traders mentor, I have a goal to help you get there. To help you understand what it is that you need to change in order to fix the things that prevent you from being successful.
One of the ways I’m doing it is by sharing my knowledge and my own personal experience with you. In my Free Newsletter, the Weekly Markets Analysis, and in blog posts like this one.
The other way I’m doing it is through the Elite Zone service, in which I pay close attention to each one of my members and empowering them to transform by setting an example and being as transparent as I can about my trading style and techniques.
If you read this blog post and feel like it relates to you and it touches the problems that you deal with, try to implement the changes I’ve mentioned above.
Those can help you… and if not, try to find your own ways to stay out of the insanity circle.