Trader Performance May Not Be as Bad as They Say


Here’s an interesting forex broker table posted at Forex Magnates. It lays out the % of profitable traders among its customers.

There’s considerable talk among retail traders that 95% of those who enter the forex market crash and burn. The figures above, which show the % of customers who have made money vs. lost money in a given quarter, would seem to suggest the 95% is an exageration. I’ve always felt that was likely the case, but keep a couple things in mind when looking at the information above.

First, % unprofitable, I believe, includes break-even accounts. That means folks who didn’t do any trading at all during the quarter would be counted as unprofitable. (Clarification: The broker has indicated that inactive accounts during the quarter were not included.)

Second, we have no indication of how profitable or unprofitable these traders are based on these figures. I bring this up because it could be the case that the profitable folks are only just and the unprofitable ones are very, or vice versa. We have no way of knowing.

Third, I don’t know how closed or blown-up accounts are accounted for here. One of the issues with performance metrics is the survivor bias. Is the % profitable simply a reflection of the fact that the unprofitable traders are churned out of the count?

Here’s something else worth considering. According to numbers I’ve seen from among live trading performance of members of one social trading network, 60% of all trades were profitable. They’re % of winning traders was comparable to what’s show in the table above. What’s the conclusion? Something I’ve said many times. Win % is not what determines trader performance.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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  • http://blog.mdwoptions.com Mark Wolfinger

    John,

    I don’t believe this proves anything about the 95% hypothesized failure rate. Here’s the single biggest problem with survival bias:

    The traders who have accounts at the beginning of each quarter are the survivors from all previous quarters – perhaps going back many years. No matter the failure rate, you have number of traders who have proven (for at least one quarter) that they can make money. All known failures have been eliminated.

    That makes the number of accounts that will be profitable in the current quarter higher and distorts the data. To get a true reading, you really need data on the number of brand new accounts – and their profitability – each quarter. I cannot imagine that such data is available.

    Regards

    Thus, the number of profitable accounts must be higher – by some unknown