95% of Traders Lose: Is this Stat Misleading?

[GCB 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. 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.

[Anonymous 11]

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.

 

.

 

Seems to me if you put money into an account you should be counted. That’s the key here. Anybody with some money and a dream can start trading. Clearly that should result in high failure. A lot of very smart people, with the best educations money can buy, have difficulty trading. It stands to reason that the "average Joe" would not be any different.

 

A lot of people will mention psychology. We all have our demons, even if we don't know about them. "Trading the S&P's on a 5 minute timeframe is the best naked psycho therapy.."-Bill Williams. If a person does not have the mental make-up to trade, they can still open an account.

 

Anybody can move to LA and be a waiter/actor. Most fail. Fewer Brain surgeons wash out because they are washed out prior to reaching the end. That is, actually being a brain surgeon.

 

As I just posted in anther thread, Harvard did a study and came to these conclusions.

 

Yes, systems sellors and hucksters may use this to their advantage. But they could not if there was no truth in it. The turth: the failure rate is high. And for a zero sum game (which impies 50% failure) it is more than half. My broker says it is not 95%,but then again he has the yacht

[Soultrader 12]

Interesting point GCB and Pivotprofiler,

 

I think its similar to the players in a casino. How many players go home with profits? Majority of the people seek entertainment while the very few professionals are only there for one reason: to make money. Same with a game of poker. There are players who enjoy playing and players who find poker tremendously boring but play because they can make money. The 95% stats count in every single player regardless of their motives for participation. It would be particularily interesting to see additional stats for traders who actually went through some trading. Perhaps we can take a look at the records of traders in prop firms. I remember reading in a book once that out of 20 prop traders only 2-3 were the only ones profitable. Of course this is just from one sample.

 

They say trading is a risky career and many people view starting a small business as less riskier. WRONG! My folks also own a company which is approx 30 years old now and they have also told me that those that make it pass the second year are the minority.. roughly 10%.

 

If you dont know who you are... the markets is definitely an expensive place to find out. I have learned alot about myself ever since I started trading. Unfortunately traders who go bust and never return fail to look within themselves.

 

I do think traders have a higher probability of success compared to musicians, artists, or actors though. That 95% is just a number to scare ppl off. I knew about the 95% failure rate before I started trading.. but I was actually attracted to it instead. Gotta love the challenge in this game.

[GCB 10]

I think the point is that broadly speaking, yes, 95% of traders lose--but the mistake is to think that 95% of those who work their butts off, develop detailed trading and money management plans, work to practice winning psychology and who are very, very serious about this business lose. I don't know what the stat is, but its not 95%.

[Anna-Maria 10]

It’s a very contentious issue isn’t it. I’m sure the trading business reflects similar success-failure rates across the mainstream business arena.

 

As with any enterprise, the success factor is dependant upon & reflects the degree of application & compatibility of the driver.

 

Most of the folks I know personally, who are still engaged in this industry, appear to possess very similar behaviour traits, regardless of their instrument preference.

 

I think the most important aspect is the fact they’ve found their niche or strength regards the type of execution model (timeframe etc) & template base. By that I mean they wrap a combination of strategies or systems around them, which are compatible with their personalities & constantly work (focus) to improve or develop their (strengths) awareness of their chosen market, in tandem with their execution mode.

 

They’re not easily distracted, neither do they stray from their goals/aims. And they most definitely won’t flit like butterflies from one methodology to another in search of the ‘easier road’

 

It takes a certain personality type to progress in this industry. A sound base in math, analytical & methodical strengths are a given. To be honest, those who enter via the college intake route will receive comprehensive training & coaching thru their firms & eventually ‘migrate’ to their trading niche.

 

Those who come to the table from outside the firms or shops will often seek some form of coaching or guidance from recognized industry personnel. And the fortunate few, who find success outside of those avenues, would generally succeed in whatever they choose to turn their hands to, due to their naturally positive, aggressive & savvy personality traits.

 

It’s not simply the fact they work hard, but just as importantly that they work smart!!

 

I take my hat off to those who grind away consistently from a standing start. The workload (research, application, persistency etc) is daunting. It’s a bitch of a task for those with industry experience, let alone those without. It’s by no means impossible for folks to progress without some type of training/coaching, but the time factor certainly becomes extended.

 

Which is why those who are farther down the road constantly advise newbies to take their time & explore their options before committing their dollars. If you’re fortunate enough to unearth a method or strategy combo suited to your personality style, & you’re prepared to put in the hours to thoroughly test & research your findings + ensure your market is suitable for your objectives, then your chances of success are greatly increased.

 

But be prepared to burn many candles & try to accept the frustrations & setbacks as trade-off’s & part & parcel of the learning curve. I guess the term “persistence†is a very under-rated statement in this industry LOL.

[Guest KhurramNaik]

Well the thing is, so many natural phenomena fall into a power distribution, a few peopel do spectacularly well like George Soros. Traders have better tools than ever to trade. Jason Jankovsky, our analsyt was telling me when he started out there was no published data on most markets, you had to chart by hand. The question is, is this data being used better than ever? That is, have we seen an increase in productivity? I think the increase in productivity from the Internet and online services certainly fueled part of the stock boom (and bust, with overinvestment in telecom services). I don't really know.

[ezduzzit 10]

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

[GCB 10]

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.

 

Well said.

[Soultrader 12]

"I am tired," he said, "of hearing the public and the papers blame Wall Street for parting fools from their money. Take the biggest losers. They are not the piker suckers, who only lose what they risk-pennies. It's the successful business man, the shrewd merchant, who is the biggest sucker of the lot. He has made a fortune in his own line? How? By being on the job for years; by learning all there was to know about it; by taking reasonable chances; by utilizing his knowledge and experience to anticipate probabilities. He wants to increase that fortune at a faster rate and with less effort. He decides to make his money work for him - at high wages. He assures himself that as he is taking the risk of losing every cent he puts up it is only fair to make more than his usual profit. Why, that man doesn't lose his money in Wall Street. He loses it in his own office. It isn't the game that beats him; he beats himself. Am I right?"

 

- page 11, Reminiscences of a Stock Operator -

[Anonymous 11]

"I am tired," he said, "of hearing the public and the papers blame Wall Street for parting fools from their money. Take the biggest losers. They are not the piker suckers, who only lose what they risk-pennies. It's the successful business man, the shrewd merchant, who is the biggest sucker of the lot. He has made a fortune in his own line? How? By being on the job for years; by learning all there was to know about it; by taking reasonable chances; by utilizing his knowledge and experience to anticipate probabilities. He wants to increase that fortune at a faster rate and with less effort. He decides to make his money work for him - at high wages. He assures himself that as he is taking the risk of losing every cent he puts up it is only fair to make more than his usual profit. Why, that man doesn't lose his money in Wall Street. He loses it in his own office. It isn't the game that beats him; he beats himself. Am I right?"

 

- page 11, Reminiscences of a Stock Operator -

 

Great book. One of the best books on trading in my opinion.

 

I interpret this to mean something I was talking about in another thread:

 

Those that make it in this game do something very fundamental, yet easily missed by most; they survive. They survive long enough to learn how to win at the game. The trader that does not beat himself, has a greater chance of being around to beat the game.

 

One way of not to beat yourself, cut your losses and let your profits run. It's old, it's cliche. But it was good enough Livermore.

 

By staying in the game, one is learning all there was to know about it, learning to take reasonable chances, and learning to utilize his knowledge and experience to anticipate probabilities.

 

This survival rate can not be large. Especially if you consider that from birth we are programmed not to be traders. That is , many elements in trading are counter to things we are taught in life.

 

For example, in some schools a grade of 92% is an -A. That's 92 correct answers out of 100. An F could be for 60% or below. Trading is the opposite, if you are correct 40% of the time, you're doing better than most. But this is a percentage that is equated with failure in school.

[brownsfan019 17]

As I mentioned in another post, that stat is a joke and means nothing. There's no substance to it.

 

While stats are based on numbers, stats can be manipulated very easily to the person or vendor looking to benefit from them.

 

It's easy for someone that loses in trading to say that so few actually make it, which in turn makes them feel better about themselves. Misery loves company.

 

One thing I have learned in my years of trading - don't pay attention to any stats that you personally have not compiled. Most everyone out there has an ulterior motive - whether that is to simply feel better about their own failure or to sell you the holy grail that will prevent you from becoming part of the majority of losers.

 

Note - as you can tell, this is one of those things that really, really gets me going. I believe that stat was created by the numerous vendors out there trying to sell you the magic pill of trading.

[drk1t 10]

The number one reason for small businesses failing is lack of adequate capitol, I'd guess the same reason for traders. If a person can stay in the game long enough they have a much better chance of learning what works for them. If it was easy everyone would be doing it, or perhaps I should have said, "still doing it".

[brownsfan019 17]

The number one reason for small businesses failing is lack of adequate capitol, I'd guess the same reason for traders. If a person can stay in the game long enough they have a much better chance of learning what works for them. If it was easy everyone would be doing it, or perhaps I should have said, "still doing it".

 

Good point drk - a trading account of $2500 trading E-Mini's is more than likely eventually going to be blown out.

[ZOSO 10]

The 95% lose number is spot on according to every futures broker I have worked with and they should know since they have access to all the accounts. Don't know about stocks.

[steve46 12]

I see the old adage of the majority losing in this profession and find it easy to understand. Few find their way, fewer still are willing to do the work to maintain whatever advantage they started with.

 

Most do not learn to manage money (risk) adequately, therefore they eventually (quickly or slowly) lose it all.

 

Also notable to me, are the many threads where newbies are looking for technical indicators. I believe the majority of professionals use moving averages, pivots and volume. Knowing that these are primarily visualization tools, they also use previous daily, weekly and monthly price points (highs, lows, settlements) as areas where price might look to "test". The concept of "tests" remains the most important single concept from which to find a tradeable approach, and of course when Market Profile was introduced, many found that a viable basis for structuring a trading plan.

 

Those of us who lasted long enough developed what used to be called a "feel" for the market. This simply meant that after a long enough exposure to the work, you knew what price was likely to do, because you "knew" what your fellow professionals where looking at, and what they were thinking. In other words you learned to "read" or anticipate human behavior.

 

Trading as a profession is an obstacle course. One either learns to overcome the obstacles or one falls by the wayside.

[Minis Trader 10]

Fact - A hiigh number of new traders loose money!

 

Fact - Many of those traders are under capitalized and uneducated without ever putting in the time and work to become successful.

 

Fact - Most new traders are not willing to apply the blood, sweat and tears required to become successful in this profession. They may start out strong for a few days, weeks, etc but when they dont see any immediate results they move on or wash out.

 

If you go back to "Think & Grow Rich", most people stop 3' short of their dreams. For some the last 3' is too much to take.

[MightyMouse 12]

95% is probably a number of convenience than anything else. I remember stats from the 1980's that were more like 80% which is still high.

 

But, your typical trader who learns a system or finds an edge will begin trading without preparing himself mentally and he keeps falling into the trap of minimizing gains and maximizing losses and blames it on the system.

 

Unfortuately, he tries to change the system, never realizing that the system is not the problem.

 

What's also unfortunate is that the only way to find out what needs to be changed mentally is by trading and making the poor judgement mistakes.

 

BTDT and am still working on it.

[ZOSO 10]

The 95% number give or take a few hundred basis points, is correct.

 

Again, my futures brokers have confirmed to me and they have no reason to lie. On the contrary, I behooves them to tell a rosier picture so more people get in the game and generate more commissions, but the ones I use are friends who have no hidden agenda.

 

With like odds like that, you have to wonder so many are so intrigued and think they are smarter than the next guy. Human nature I suppose.

[OAC 10]

If the futures broker's figure is 95%, then the actual figure should be much higher. Because the 5% that actually win will include a few that by luck stubbornly held on to a postion that gave them a big win that wipe out all their other losses. Next time they may not be so lucky.

What I am really interested in is their figure on day traders, someone who does not carry position overnight.

[DURALEXSETLEX 10]

I would like to phrase it like this: 99.9 % of novice traders lose most of their money in the first few months of trading! The number of losers gets smaller thereafter...

Think about it this way - even pros lose some money! It's part of the game! so how can a beginner not lose without any prior experience of trading???

I' ve been there! The difference is that most people get wiped out and never go back to trading....and a handful of losers that are stubborn enough go back and try again and again

and finally learn something!

[MightyMouse 12]

It would be a fairly extensive survey to determine what % of traders lose money. You would have to break it down so many different ways to get an accurate statistic and it’s doubtful that a futures broker would undergo such a task or is capable of accurately assessing the results. It would certainly be wrong to look at the accounts of a single futures broker and use those results to generalize about traders without knowing the traders timeframe, risk tolerance, trading instrument, number of accounts at other brokers, use of stops, attitude toward risk, years trading, purpose for trading, years the account is open, and etc., etc.

 

So, if you took a cross section of the survey and found a grouping of traders who take positions and hold them for at least a year without the use of stops, you’ll find that the statistics for this group would be closer to 50%

 

So, they may be telling the truth, but citing a statistic that really has no basis. In their business it’s better to err on the conservative side of statistics than to risk the liability of being misleading. So, you can make a lot of money, but you have a 95% chance of going bust, still lures enough new blood to the game because everyone who is curious knows how much a lot of money is.

 

The best statistics would come from academia and if they are citing the statistic from an academic paper, then I would like to know which one.

[sevensa 10]

My biggest problem with the statistic is the definition of a trader. Just because someone has an account, does not make him a trader. If 10 guys decide to buy themselves planes and 5 take lessons and learn to fly and the other 5 do not do anything and jump in the plane and crash promptly, would that be correct to say that 50% of pilots crash even though the 5 which crashed clearly were no pilots, but just fools owning a plane?

 

Someone opening an account with no experience nor any interested to put in the effort to learn how to trade is not a trader, but a gambler and should not be included in these statistics.

[BlowFish 10]

83% of all statistics are made up on the spot! Actually all published figures that I have seen (rather than anecdotal 'evidence') are closer to 80%. This fits well with the pareto principle. There is usually a double digit percentage of people who just churn, neither winning or losing.

 

Depends how you define lose, I guess does 5 years of winning mean you have crossed over? Take Schwagers market wizards for example most had blown up a couple of times before making it. What is more surprising is that most have subsequently blown up or just left trading. Personally I think there is a strong argument to assume less risk over time to avoid your personal black swan event.

[JBWTrader 10]

I believe the number quoted is a good marketing number...if the number was 99.5 % I think I lot of people would be put off trading or even after one blown account would get the message earlier..that it is very tough...

 

So the 95% number is wide enough for the belivers to think they are going to be the 5% that can really do it and so are kept in the game longer because this 5% number is still large enough for a challenge and gives people more hope...

 

I guess only the brokers compies have access to "their" numbers of those traders over the long run survive and prosper.. I have never heard these numbers made public...would make interesting reading hey ?!

 

Best

John

[VolumeJedi 10]

According to the Small Business Administration (SBA), 90-95% of all new small businesses fail within the first three years. Trading is a business and as such it only makes sense that it would have similar statistics. In fact, because of the psychological aspects of trading, it makes sense the number would skew higher.