Why Do 70%+ Traders Lose Money?

Why Do 70%+ Traders Lose Money?

What Do Traders Do Wrong?

It’s been widely spoken about for some time that the trading industry has a high failure rate.

The odds are stacked against retail traders – we’re up against hedge funds, banks, institutions and algorithms that are all smarter and faster than us.

The visibility behind this statistic became much more transparent in 2018 – ESMA intervened in Europe and introduced new measures for investor protection to help regulate the trading industry.

These restrictions involved restricting leverage, negative balance protection and a requirement for brokers to have transparency on the percentage of clients that lose money.

If you go onto a broker’s website in Europe, the percentage of clients which lose money is usually around 70%+.

Given we are at a time in history where most retail traders have access to some of the most sophisticated news and analytic platforms, you have to question why most retail traders struggle to make money consistently?

Research was done by FXCM that reviewed 25,000 traders who executed 43 million trades over a 15 month period.  Here were the findings:

  • Win percentage: 62%
  • Average pip gain: 48 pips
  • Average pip loss: 82 pips

Based on this research, it was concluded that there are two things that the majority of traders typically do wrong:

  • Their average loss is bigger than their average gain
  • They try and pick tops and bottoms (trade against the trend)

This information actually isn’t ground-breaking; in fact, I would bet that most strategies that you come across would preach the ideas of:

  • Trading with the trend
  • Cut your losers short and let your winners run

If it was as simple as just following the set guidelines, then why do the majority of traders lose money?

The answer lies in the idea that it’s usually a trader’s thoughts and emotions which tend to get them to sway from their plan – it’s far more a game of psychology than finding a Holy Grail strategy.

Why Do Most People Make the Same Mistakes?

The answer is usually rooted into how we fundamentally think and how we’re brought up.

It starts with the idea that our minds are typically wired to protect us from pain – therefore most thoughts, emotions and signals are a trigger to get you to take an action to avoid being hurt.

Let’s look at both of the fundamental problems noted above and explain why these usually work against the natural human mind:

Average loss being larger than the average gain

Why is it so hard to cut a losing trade?

If you think about this logically, as long as a trade is open, there is a hope it will come back in your favour and you can either still make a profit or maybe get out a break even. The resistance your mind creates in stopping you from cutting losers is to help you avoid the pain of taking a monetary loss – and sometimes even avoiding the kick to your ego.

Why do most traders end up closing winning trades early?

Well, again, let’s think about this logically, when you see an open profit, your mind sends you signal to get you to close it so you can increase your account balance by extracting money from the market. That’s our objective as traders so it makes perfect sense. But when you think about the wider problem – most traders run losers bigger than they run winners, you can see over time this will become an inherent problem.

Again, in both scenarios, your mind is just doing what it’s designed to do – protect you from pain.

They pick tops and bottoms

Most traders struggle with this as they find their mind naturally tends to view the market in the same way we view shopping in the real world – we look at things as either cheap or expensive. In our normal everyday life, when we go to a shop and things are on sale, it makes sense to buy them as you’re getting a bargain. When things are expensive, it makes sense to avoid buying them as it’s better to wait for a more reasonable price.

This line of thinking, whilst it’s beneficial in the real world, can work as a real detriment to traders. Generally, if a market is going down, it’s not cheap, it should be sold and look to buy it back lower. If a market is going up, it’s not expensive, we should be looking to buy it and sell it back higher. The moment we use our normal everyday mind to take decisions in the market, you can see it directly works against how the markets tend to operate.

What do consistently profitable traders do?

So what is the one thing I see that consistently profitable traders are able to do that is so different to the majority of people that lose money?
If I had to pin it down to one thing which I believe encompasses everything we’ve discussed, it would be thinking about the markets in a probabilistic manner.

It’s not the way our minds are wired, but it’s the one thing that gets us to think about the markets in a way which we can consistently extract money from over an extended period of time.

So what does a probabilistic mindset encompass? 
It means viewing the markets like you’re the owner of a casino – not a casino customer. Let’s start at the basics – how and why do casinos make money in the long run? They too are operating in an environment whereby the outcome of the next game is never certain – but yet they are able to extract profit consistently. Casinos do one thing in every game available – they have an edge.

Casinos understand that an edge simply means there is a higher probability of one outcome over another over a large sample sizeThis is the exact way we must train ourselves to think as a trader – we only choose to operate when we have an edge present and we understand that actually the short term outcomes are meaningless.

It’s the outcome over the next 100 trades that really make the difference.

When your mind truly works in a probabilistic manner when it comes to the markets, your expectations even before you put the trade on should be aligned to any outcome that may present. When you expect nothing from the market except for it to either go up or down after you execute a position, what is there to be disappointed about? When you’re not putting too much weight on the outcome of your next trade, there is no reason to linger on losses or need to take revenge.

You simply stick to your plan and execute when your edge presents. You trust that over an extended sample size of those positions, you will come out on top. The message I am trying to get across here is that there are thousands of ways to trade the markets.

You need to be able to test your strategy to know over time this will statistically make you money – based on our findings, it would suggest you have a greater chance of making money in the long run if you are able to:

  • Cut losers quickly
  • Let winners run
  • Follow the trend

But ultimately, even if you have a profitable strategy, it’s the quality of your mindset and expectations of the market that will determine your success.

If you’re an aspiring trader, keep things simple and judge your success based on how well you executed your strategy – not whether you made money. If you do things correctly and execute on a proven strategy, money should simply be the by-product, not the goal.

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