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Trading Tips

Do 95% of traders fail?

One of the things thrown around a lot in trading forums and the like is the idea that the vast majority of traders fail. Oftentimes the number is said to be 90% or 95%. I like to follow these discussions. They provide some really interesting insights into how different categories of traders think.

New traders seem not to want to believe the failure rate is so high. If you think about it, that makes total sense. They are full of optimism, sure they will succeed. They don’t want to consider a high probability that they will not.

Then you have the more experienced traders. They’ve seen people come and go in the markets. They’ve probably been through the wars themselves, and maybe blew up an account or two already. In other words, they know from first-hand experience that being successful in the markets isn’t easy.

Brokers and the like are never going to willingly report trader failure rates. It’s not in their best interests to do so, even if the numbers aren’t as high as 95%. So from that perspective we are unlikely to see any legitimate, verifiable numbers. Fortunately, though, as part of my PhD research into trader performance, I was finally able to look at some usable data.

The bottom line is that the success rate in trading is pretty small. My own research is based on retail forex traders, who people think have an especially high failure rate. My understanding, though, is the failure rates floated around originally came from the futures market, and well before retail forex really got going. Also, I’ve seen research into stock market traders that supports the low success rate. I think the bottom line is that active trading is hard and very few people achieve long-term success.

So is the failure rate 95%. I think that’s a pretty close approximation, though it depends how you choose to define “failure”. The evidence leading me to this conclusion is more than will reasonably fit in a blog post, though.

So I decided to create a report.

It has all sorts of real data on how traders perform. I’m talking about actual returns, not hypothetical stuff. This is info you won’t get from the brokers.

I don’t present this info to scare people. I offer it up to give people a realistic expectation of how challenging trading will be. You don’t just open an account and start making money. It doesn’t work that way.

My hope is the information in this report leads to a deeper conversation about why the failure rate among traders is so high. That’s where we can start figuring out how to make improvements.

Fill out the form below to get a copy for yourself. It will give you some stuff to think about for your own trading.

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Trading Tips

Are you really cut out for trading?

confused

I don’t know if this is really a recent post or not as every post on her sight seems to have the same date on them at the moment, but at some point Jessica at Rouge Traderette shared some thoughts on how to figure out if trading maybe isn’t for you. She presents a trio of signals that maybe it isn’t. I’ll address each in turn.

1) You can’t sleep
I actually think this might have more to do with either excitement or excessive risk taking. We’ve all been in situations where we’re just too excited to sleep at night. I know in my own trading there have been times I’ve awaken in the middle of the night and checked my positions to see how they were doing from a positive perspective. Do you maybe want to reign that in a bit? Probably.

From a negative perspective, if you can’t sleep because you’re worried about the market going against you then you’re probably trading too big. You’ll sometimes hear the advice that you should set your position size to the point where you can sleep at night. If insomnia has you up can checking your positions in fear of taking a loss, then it’s probably time to cut your size.

That said, if you are really hesitant to even pull the trigger on a trade regardless of size for fear of losing money or simply being wrong then maybe trading isn’t for you. I once had a student in a class who wouldn’t even do a trade in a demo account out of fear. Not a good sign for a would-be trader.

2) You are overly concerned with your losses
Jessica actually presented this in terms of denial, which is definitely something to be worried about. If you can’t face up to your losing positions, that’s not a good thing! You’re going to have a lot of losers over a trading career. You need to learn to be able to handle them. Going down the denial route will almost invariably lead to disaster.

Think of it in these terms. Traders who don’t abide by their stops are the ones who tend to take the biggest trade losses because their positions just keep running against them. What do you think is going to happen if you are in so much denial about a losing position that you won’t even look at it?

3) You can’t separate trading from real life
As with anything else, you don’t want trading to become your whole life. That’s not a healthy situation. On the relatively mild side of things it can lead to early burnout. At the more extreme end of the spectrum is things like lost relationships and disastrous trading because you’re taking things personally.

I admit, trading can be very stimulating for any number of reasons. For that reason, though, caution is required. There’s nothing wrong with trading as a form of entertainment, so long as you understand that’s what it is and set your financial expectations and commitments according.

I would add one BIG thing to this list:

You think that you will change your life overnight.

Trading is work and like anything takes time. If you’re looking for a quick fix, walk away.

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Trading Tips

Picking the best forex pair(s) to trade

currencies

Chris as Winner’s Edge Trading did a post a couple months back with suggestions for how to go about picking the best pair or pairs for your forex trading. Essentially, his list came down to a handful of key considerations:

1) Your strategy or analytic methodology

2) Currency correlations and diversification

3) Liquidity

The list actually has eight factors in it, but I consider several of them to be essentially the same type of consideration. Thus my list of just three.

Let me expand on them.

Strategy considerations
In terms of #1, you are best off looking at currency pairs which are well suited to the approach you’ll be taking in your trading. Generally speaking, that will either be trend oriented or range-trading oriented. Thus, if you are a trend following trader you are going to be best off working in pairs which have strong trending characteristics in your chosen time frame. Likewise, if you favor a more mean reversion oriented approach, you’ll want pairs that tend toward ranging and/or sharp counter-trend moves.

Note that one currency pair can fall into both categories depending on time frame and market phase. If there are strong underlying factors at work, then in the higher time frames the pair will tend to trend, but maybe in the shorter time frames it may go through ranging periods. These things can and will change over time. As such, it makes sense for you to have a way to identify current market conditions.

Correlation/Diversification
If you’re trading primarily the major currency pairs it is very hard to truly have an uncorrelated portfolio of positions. You can only go 3-4 deep with majors and major crosses before you have one currency in multiple pairs, which automatically introduces correlation. And even then, certain currencies will tend to naturally be correlated based on the current economic environment. For example, the CHF and EUR will often be positively correlated because both are impacted by the fundamentals of the European economy.

You can certainly trade multiple pairs which share the same currency (e.g. USD/JPY, GBP/USD, AUD/USD). If so, however, you need to account for that in your risk management strategy. It is highly likely that all the pairs you trade sharing that common currency will move together based on the same factors. That’s great when the market goes in your direction as it will multiply your gains, but the same thing happens with your losses when the market goes the other way.

Liquidity
For the most part, liquidity isn’t a major concern for retail forex traders as your orders will usually get filled at or very close to your order price. Yes, during major news events there can be slippage when trading outside the major pairs and crosses – and even in the majors on occasion. If you’re operating in a higher time frame, though, that’s likely not a major concern.

The bigger consideration here is the cost of trading. The more liquid pairs have narrower bid/ask spreads. That can significantly impact your returns if you’re an active short-term trader, but maybe not so much if you playing the longer-term market moves.

How many?
One additional consideration I would add into the mix is how many pairs you should trade. This is a question which comes up a lot in trading forum discussions. To my mind, this all depends on your time frame. If you’re a day trader you’re likely going to want to keep your focus fairly narrow – especially if you’re in and out frequently (e.g. scalping). As you go out the time frames, though, you probably need to be tracking more pairs. It’s simply a function of providing yourself with enough trading opportunities.

In Chris’s post he also mentions personal preference, which I suppose can be an additional factor. If you want to truly be a good trader, though, you should be able to trade whatever market makes the most sense at the time.

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Trading Tips

Did you really make that market call?

confused

A couple of different things came together to motivate this particular post. One of them is a post on the Pys-Fi blog from a few years ago I recently revisited. It’s on the subject of our memory, both in general terms and specifically with respect to our involvement in the financial markets. The driving thrust of that pieces is that we cannot and should not always trust our memories.

That’s right. Your memory is not nearly as solid as you might like to think. It’s subject to external manipulation and also your own internal issues like hindsight bias.

That article, in turn, reminded me of a resent EconTalk podcast episode on the subject of forecasting. In it, guest Philip Tetlock talked about reviewing the forecasts of a group of people who had been put through an experimental process. The subjects were asked to recall their prior forecasts and the degree of accuracy they exhibited. Tetlock found that the forecasters often were not nearly as accurate as they thought they’d been.

Can you see how this might be an issue in your trading?

If you can’t rely on your memory of your past performance making market calls, how much faith can your have in the methodology you are using? Not much, I’d say.

So might think that a way to avoid this sort of problem is to trade entirely mechanically. Maybe not, though.

In the final analysis, your faith in any system or approach is going to be reliant on your recollection of it’s performance. Selective memory could see you exaggerate the system when things are going well – perhaps leading to over-trading. Similarly, it could lead to not taking trades during draw down periods. Neither is an optimal outcome.

In the post Being a reflective trader from the other day I talked about the idea of reviewing your trading periodically. This is something which might help. Regularly looking back over prior trades will tend to help keep a realistic record of your performance – or your system’s performance – in your memory banks for future recall.

Something to consider if you’ve hesitated in keeping a trading journal.

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Trading Tips

A rookie trader’s plan

rookie

A while back, Mark Wolfinger (a contributor to Trading FAQs) was asked by a rookie trader to comment on his trading objectives and plan. Basically, this newbie had set himself the nominal goal of making $2ooo/mo from the market trading options. At first appearance, an objective like that is nothing new, especially for those who have it in mind to reach the point where they can trade for a living. As the following question quickly made clear, however, this was a person with zero trading experience.

“Should trading be limited to strictly paper trading or is there an advantage to trading very small sizes with real money?”

I’ve already shared my views on demo vs. live trading before, so I won’t tackle that subject again here. Instead, I’ll piggyback on some of what Mark has to say in his post.

Firstly, he talks about the importance in considering what the $2000/mo objective is relative to one’s capital. As he notes, if your account is $20k then you’re talking a 10%/mo return, which is quite ambitious to say the least. And looking at things from the other side, if you’ve got $1mm then such a small objective is hardly worth the effort. You can make more with very simple investments.

The big thing in all this, though, is that if you’re a beginning trader you shouldn’t be thinking about anything above and beyond getting first to being a break-even trader. You’re going to make a whole bunch of mistakes that will cost you money. Consider that a given and you won’t be disappointed.

Once you’ve worked your way through that phase you can start focus on making any kind of consistent positive return – over whatever time frame is relevant to you. Having achieved that, you can then start scaling things up and begin to think about profit targets.

Personally, I’m not a profit target type of trader. But then I don’t trade for a living and have no desire to do so. For others, it’s a bigger consideration because they need the money to pay the bills.

Mark offers up some other good new trader advice, so definitely give his post a read.

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Trading Tips

Being a reflective trader

armsraised

Brett at TraderFeed recently offered up a post titled How to Be Your Own Trading Coach. Seeing as he’s the guy who literally wrote the book on self-coaching as a trader (The Daily Trading Coach), the headline alone got my attention. 🙂

In the post Brett recommends a period exercise in which you pick out your best trade and your worst trade of whatever time period is relevant to your trading (day, week, month, etc.) and analyze them. Basically, what you’re looking to do is to identify what you’ve done well on the good trades so you can repeat that in the future. At the same time, you’re looking to pick out where you failed with the bad trades so as to avoid those same mistakes moving forward.

This, of course, is a very good bit of advice. It is only through reflection and proper self-analysis that we can develop ourselves as traders over time.

I have one thing to add to Brett’s suggestion, however. It has to do with the judgement of good vs. bad trades.

The natural inclination is to think of good trades as winning ones and bad trades as losing ones. This is too narrow a way to look at things, however. In reality there are four trade quality and trade performance combinations (excluding break-even trades).

Good trade / good performance
Good trade / bad performance
Bad trade / bad performance
Bad trade / good performance

In other words, you can do everything right and still have the markets go against you – bad luck. Similarly, you can do everything wrong with your trade and still end up making money – good luck.

When you examine your trades, be honest with yourself. Did you actually make a good trade or not, regardless of whether you made money?

Of course all this requires an understanding of what makes for a good trade. That’s a conversation for another post, though.

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Trading Tips

More trading resolution advice

Trading Goals

Near the start of the month I talked about trading resolutions and some things that you can do to help keep the ones you make. Over at SMB there’s a recent post on the subject which provides a slightly different perspective on things.

The idea is the same – providing advice for keeping to your trading resolutions. The areas of focus are a little different, though. The advice offered is:

  1. Post in your journal
  2. Breathe
  3. Exercise

The first one is probably something you’ve come across before, and not just in terms of New Year’s resolutions. Keeping a trading journal is very often recommended as a way to keeping your trading on track in general terms. It’s a reasonable starting point.

How many traders would have thought that breathing would be on the list, though?

The focus at SMB is more toward day trading, so it probably makes a fair bit of sense that they’ve included a specific directive to decompress at a certain point during the day (or multiple ones, depending). Having worked in the market for many years, I can totally attest to how easy it can be to get yourself caught up in the day’s developments and wound up really tight. Definitely not a bad idea to schedule a bit of an unwind periodically.

Exercise, the third bit of advice, could probably be restated as something like “take care of your health and fitness” as eating well and getting sufficient sleep are all part of the equation. Obviously, that’s not specific trading-related advice. It’s very relevant, though. Your health and general well-being for sure plays a part in your trading performance. There’s no two ways about that.

One could perhaps chuckle a bit at these recommendations, though. If you think about it, for many people they represent things that should be resolutions in their own right. 🙂