95% of Traders Lose: Is this Stat Misleading?

[dv4632 10]

Brett Steenberger once mentioned a private conversation he had with the CEO of a major retail brokerage and the guy told him that 80% of their customers blow out their accounts within a year of opening them. The percentage was much higher for customers with small accounts, as they took on more risk in an effort to generate worthwhile returns.

 

I don't remember much else about it other than that stat. Obviously must have been a futures/forex broker, I can't imagine that many people going up in flames that quickly trading stocks.

 

As for the longer term survival rate, I have no idea.

[TimRacette 11]

Ya Todds, and I agree with Negotiator, when I say mental preparation it's actually the process of going through and reviewing the trades each night after the markets are closed, determining your exact criteria for entry, and then close your eyes and visualize that setup so you have no doubts as to what you are looking for and what you will do when that trade sets up.

[SpearPointTrader 10]

Ya Todds, and I agree with Negotiator, when I say mental preparation it's actually the process of going through and reviewing the trades each night after the markets are closed, determining your exact criteria for entry, and then close your eyes and visualize that setup so you have no doubts as to what you are looking for and what you will do when that trade sets up.

 

I often do the same visualization. I take it one step further though. I have actually drawn out all my favorite setups on paper and created a "Cheat Sheet". Then I compare the chart on the screen, to the set up on my cheat sheet. This helps keep me form going off on wild goose chases.

[minnieau 10]

Your post is excellent and well written. I have been trading/investing for over 10 years and can't agree with you more on everything you shared.

 

A discussion of this nature could probably go on forever without achieving a useful result. At the end of the day, I doubt any of us would have a good factual handle on the real percentage of successful versus unsuccessful nor am I at all sure that comparing trading to other forms of endeavor has any particularly useful application toward arriving at the answer.

 

Most all professions demand their pound of flesh. It has always been so and shall always be that way. Some people perhaps more easily adapt and feel at home in the markets but I think we can all rest assured that percentage is mighty darn small.

 

Let's assume for a moment that the real number (including all who try to whatever degree, which is as it should be measured across all endeavors) is in fact 95% failures, or even 98% failues if you wish. What does that really mean to a particular individual? It means nothing more nor less than what that individual's personality and mindset take it to mean. To some it will be an exciting challenge, wherein they have decided they shall be in that 2% to 5% number "no matter what it takes". To others, those figures will cloud their feelings, emotions and judgement and perhaps cause them to take actions in their trading which match up with the projected casualty rates. There is just no telling.

 

Soultrader hit upon an extremely important issue and that was learning and knowing yourself. It has been suggested by some of the best traders in the business that you are the holy grail for which you are searching and that it has very little to do with trading method or technique. I assure you that after all this time, there is very little new under the sun with regard to methods and strategies in trading and that almost everything has been tried hundreds or even thousands of times before.

 

Just as in other areas of life, you can take the proverbial two friends of reasonably equal intelligence, age, backgrounds, educations, beginning capital, etc. and put them both to the same task or career and have one succeed brilliantly and the other fail miserably. What made the difference?

 

Some will say it was their beliefs. Others will say it was that one had persistence and commitment and the other did not. Still others will say it was their actions or lack thereof that made the major difference. I would say that it is a combination of all the above combined with a passion or ardent interest for the career or endeavor being pursued. That brings us right back to the phrase of "no matter what it takes" or in essence "doing" whatever it takes to succeed. A large part of that is belief but belief is lost without passion and applied action.

 

I am not sure that it is truly important to know the specific surveyed percentages of faiure. In any field of demanding endeavor where the stakes are high (in both risk and reward) there are those precious few who are naturals and their success often defies explanation. However, for the rest of us it comes down to committing to do whatever it takes and then doing it over and over without giving up.

 

Most people give up quite easily and of course usually defend their poor results by blaming some outside party or when all else fails.. blaming the well known "statistics "of the industry, whether they be real or just legend. They quickly point to how it was clear the odds were totally against them from the very start and thus it should be no surprise they couldn't quite make it.

 

What is the real truth? Well, I won't claim any special access to knowing that, but my suspicions are that most people simply found reasons to give up. Whether those reasons were money, family or health related, matters little. What I suspect really matters at the end of the day, is not the statistics or power curve of success versus failure in what you attempt to do, but probably your own passion and commitment to somehow stick it out (come Hell or high water, as my father was fond of saying) no matter what hurdles you come across, until you have achieved what you set out to do.

 

In trading, my own personal beliefs tell me that it is more about conquering yourself and controlling your trading behaviors as you continue to learn about the markets, the particular instruments you trade and about the emotions of those involved that serve to drive price across the playing field. I think most people trade a long time (or at least as long as their captial holds out) before realizing that no matter what strategy or technique they use, they are not going to materially warp the probabilities in their favor and they finally realize it is really a game of controlling the size of your losses and taking trades only when you truly believe you have an edge that suggests there is a high probability that those trades will run in your favor.

 

In the final analysis, I say forget about the statistics of the industry. Forget about the search for the holy grail of methods or strategies (that includes fancy software with blinking lights and pretty colors,) and decide once and for all to commit yourself entirely to finding and developing a tiny "edge" in your method of play and then just keep coming up to bat day in and day out, often enough to let the odds work out in your favor.

 

Will that provide the answer to what percentage of people fail in this industry? No it won't, but I assure you it probably will put you on the right side of that percentage and after all, isn't that what really matters?

 

Happy Trading

[Obsidian 10]

I think this (95%) was correct before 2005. Now people can reach more resources. You can read, discuss and learn from others. Trading platforms are more sophisticated, brokers offer better trading conditions...And many people learned from their mistakes, I guess...

[Predictor 11]

I didn't take time to read through all the replies.. But there is something very important.. just because 95% of businesses "fail" doesn't mean the owners didn't make a profit. Businesses fail for a variety of reasons.. just because someone gives up on trading also doesn't mean they blew out.

 

I had a software business for several years. It "failed" but it doesn't mean that I lost money. In fact, it led to a lot of good things for me.

 

I imagine that the really good traders, those who are well trained, don't blow out so much as find they aren't making as much money as they want and can do better in other activities. The idea of the blow out trader is I think over blown (pun intended).

 

Curtis

The Market Predictor

 

According to the U.S. Small Business Administration, over 50 percent of small businesses fail in the first year and 95 percent fail within the first five years. It's interesting that this 95% number matches the infamous number of overall losing traders.

 

The problem I have with this stat is that it probabably includes every yayhoo who ever threw $3000 into a futures account and blew it out in a week.

 

The stat I'd like to know is out of all traders who compiled well-thought-out, detailed, written trading plans, what percent wins. Or, for every trader who has traded for more than 3 years, what percent wins.

 

The 95% stat may be a solemn warning, but it also may be innappropriately discouraging. It seems that, according to the statistics, if you become a trader you have roughly the same chances of success as if you start a small business in general. That's actually encouraging news to me.

[jaysmith124 10]

According to the U.S. Small Business Administration, over 50 percent of small businesses fail in the first year and 95 percent fail within the first five years.

 

The stat I'd like to know is out of all traders who compiled well-thought-out, detailed, written trading plans, what percent wins. Or, for every trader who has traded for more than 3 years, what percent wins.

 

Whether it matters, or not, it would be interesting to see a report for certain period(s) including all trading accounts. And of those accounts, how many traders moved from hobby status to trading as a business. And then, of those accounts how many lasted for more than so many years.

[todds 10]

I think a more interesting stat would be something like: what percentage of traders are successful who have put in at least 3-5 years of concentrated full time effort? Or, a graph that compares success rate against time spent in concentrated full time effort.

 

In either case it doesn't mean much personally. As someone said in an earlier post, to the determined individual, stats about the masses are irrelevant. A few are going to do what it takes to make it and the rest are not.

[jaysmith124 10]

And not only be ready, willing, and able to do what it takes, but to possess a certain personality, and the talent, that it takes.

[BlueHorseshoe 10]

Brett Steenberger once mentioned a private conversation he had with the CEO of a major retail brokerage and the guy told him that 80% of their customers blow out their accounts within a year of opening them. The percentage was much higher for customers with small accounts, as they took on more risk in an effort to generate worthwhile returns.

 

I don't remember much else about it other than that stat. Obviously must have been a futures/forex broker, I can't imagine that many people going up in flames that quickly trading stocks.

 

As for the longer term survival rate, I have no idea.

 

I recall the same Steenbarger post. If I remember correctly, there was also an interesting stat about starting account size - something like if the account was 20k rather than 10k, then the chances of survival were more than doubled.

Edited February 12, 2012 by BlueHorseshoe
Quoted wrong author

[BlueHorseshoe 10]

Ya Todds, and I agree with Negotiator, when I say mental preparation it's actually the process of going through and reviewing the trades each night after the markets are closed, determining your exact criteria for entry, and then close your eyes and visualize that setup so you have no doubts as to what you are looking for and what you will do when that trade sets up.

 

This is a great suggestion of Tim's for an end of day exercise. Another way to use it is as follows:

 

If you regularly trade intraday, then you'll most likely have forgotten the nuances of any given day's price action within a couple of weeks. Perform the visualisation that Tim recommends, then return to that previous week and use the cursor arrows to scroll through your intraday charts one bar at a time, and identify your setups (I believe some charting platforms - perhaps Sierra - actually offer high speed replays). Record your entries and exits.

 

Now get out your actual trading record for that week and compare your results - did you do any better on the 're-sit'? What had you learnt?

 

If you've got a particularly keen visual memory, then just wait longer before revisiting.

 

If you've got a photographic memory . . . well then I can't help!

[Baker 10]

I think a more interesting stat would be something like: what percentage of traders are successful who have put in at least 3-5 years of concentrated full time effort? Or, a graph that compares success rate against time spent in concentrated full time effort.

 

In either case it doesn't mean much personally. As someone said in an earlier post, to the determined individual, stats about the masses are irrelevant. A few are going to do what it takes to make it and the rest are not.

I completely agree with this post. I'm sure a good chunk of that 95% are people who just opened up an account and thought they were going to leave the markets with boatloads of cash. I frequent a lot of other forums and every single one has threads titled "just opened up a Scottrade account, what should i buy?" that pop up regularly.

[winstonsmith 10]

This stat is probably related to day-trading.

 

A lot of NoOb traders believe daytrading is the "easier" method; the less worry-free, less risky technique...so a lot of new people (who frankly don't know what they're doing) get sucked into the allure of type of "fast money" trading, that is neither easy, less risky, nor worry free.

 

Subsequently, they lose their shirts, and become...just another statistic.

 

I myself do know how to daytrade somewhat successfully, and have pretty good system in place; but I don't use it, because of the stress, and the higher probability of failure relative to swing-trading, or trading longer term time frames (my favs).

[binarymaster 10]

I really think that you are mostly the determinant of your success in trading. Yes there are factors that you cant control but there are ways to really give you the best chance at being successful and profitable in trading!

 

Personally, I began trading only after I had learned everything I possibly could about trading, the terms, tips, how to avoid common mistakes, strategies. After having a good basis of knowledge I then went online again and found a website that compared brokers, choosing one that I thought was most advantageous to me, looked promising and that I felt I trusted.

 

I started trading using all my previous knowledge about trading and keeping up with current tips, etc. I found daily broker signals and also looked at previous trends in the market. Eventually I was developing my own trading strategies by using all my information and broker signals which led me to become a highly profitable trader!

 

Basically, knowledge is power and in this case (regarding trading) is money...