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The 5% success myth busted by CFTC

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  • First Post: Oct 20, 2010 9:38pm Oct 20, 2010 9:38pm
With the new CFTC rules requiring brokers to release the percentage of successful traders, it looks like the mythical "only 5% of traders win in the Forex" rule was complete bogus. God knows how much more bogus information has been going on in these forums. Oanda had a success rate of up to 50% while most other brokers were around 25%. Of course, to be fair, these are quarterly figures, but they're far from the 5% success rate that so many Forex traders believed in.
Binary Options Trader
i think the 5% applies in the long term. The figures they are showing can br very misleading when you don't know the length the acc has been opened for and how many trades have been executed.
Well, FX is an attractive market and who knows how many new traders enter the market every day? 10 000? 100 000? 500 000? Ofcourse most of them go nuts and get rid of their money.

Calling them traders and saying 95% of them are loosers - itīs about the same as calling every man holding a knife a fucking braing surgeon (pardon my french...), never mind they are butchers, cooks, serial killers, hunters or what ever.

Would me much more interesting to know % of loosing traders who have constantly been trading for at least 2 years.
I started in stocks and full time day traded the US market for awhile. I chose to begin FX about 6 months ago as an addition to my trading, but ended up choosing to switch entirely to it because it fits to economics more strictly.

seeing how the only people who everrrr get on an online chat room or forum for stocks seem to be in the penny crowd, i would say that 99% would be a very fair assessment for many that dable in the stock world for "day trading." It would be interesting to know how many of those FX counts are day trading accounts and how many do long term holds. I have never met another person who traded stocks successfully. I literally would sit on mic listening to people make claims of profiting $40k on an freakin sub-penny stock, bahahaha.

ps. love this forum, lots of actual traders on here.=)
Would be interesting to see stats breakdown: by trading horizon (scalpers, swing traders, position traders, etc); by account size; and by profit factor.

I also can't help wondering how many 'successful' traders are using (pseudo-)Martingale or other dubious MM systems (that can deliver outstanding results for several months, before the 'death' trade sequence blows the account).

I'd also be interested to know whether the results reflect traders currently on the books, or ALL traders who've held accounts throughout the period.

I'm not querying the results outright, just attempting to point out that merely saying that "X% are profitable" doesn't necessarily give the full picture.
___________________

(And also whether the number of losing traders also includes loosing traders....... LOL).
I have left FF. Please don't expect replies to your posts.
I agree, it would be nice if it was broken down into specifics so you could compare apples-to-apples, but that probably won't happen, because normally business only do the work to report what is required rather than spending resources to go above and beyond.

But you can bet a lot of egos will be stung by this (and probably a lot of discussion that the 5% is still the accurate number or the numbers reported are screwed up) because it was a lot easier for someone to feel okay about losing when they thought 95% of ALL traders fell into that category. Now that changes to basically one in every four people are profitable!

Hopefully this information will work to motivate people with the knowledge that it can be done at least somewhat more common than previously thought. Or people will just not be honest about their results.

Should be interesting to see what the numbers do for the 1st quarter of 2011 (after the Frank-Dodd Banking Act) as compared to earlier. Might start seeing the total accounts drop as non-US residents opt to go outside the US.
Percentage of profitable players means nothing.

I think it would be better if brokers have to report equity flow from month to month, how much total deposit and withdrawal from all of his client every month report will show us the truth about forex trading.
I'm with the rest of everyone on here asking for the long term (yearly or more) success rates. Also would like to know if they are day traders or investors, individuals or firms.
Quoting moneymaker2
Should be interesting to see what the numbers do for the 1st quarter of 2011 (after the Frank-Dodd Banking Act) as compared to earlier. Might start seeing the total accounts drop as non-US residents opt to go outside the US.
The law reduced margin trading down to 50:1 right? I don't think any responsible trader would even use leverage as high as 50:1. Think about it, a 2 pip stop loss would decrease your account by 1%. With a 100:1 leverage 1 pip stop loss would decrease your account by 1%. A tight stop loss of say 15 pips would be 7.5% or 15% of your account value. I don't think I've ever used a leverage more than 5:1 to stay within my boundaries for a safe amount of risk.
Lower leverage reduces the ability to diversify with the same position sizes (or same account size). Position size and stops can vary greatly, not everyone is just scalping one position.

Higher leverage is very nice if you can be profitable with it.
Quoting Intu
Lower leverage reduces the ability to diversify with the same position sizes (or same account size). Position size and stops can vary greatly, not everyone is just scalping one position.

Higher leverage is very nice if you can be profitable with it.
Well then there I can completely see your point. I never have more than two positions open, but I see how you would need it with a much higher diversification.
Quoting Yoda_Glenn
With the new CFTC rules requiring brokers to release the percentage of successful traders, it looks like the mythical "only 5% of traders win in the Forex" rule was complete bogus. God knows how much more bogus information has been going on in these forums. Oanda had a success rate of up to 50% while most other brokers were around 25%. Of course, to be fair, these are quarterly figures, but they're far from the 5% success rate that so many Forex traders believed in.
This statistic doesn't really mean anything. If "successful" means a positive return over the quarter, maybe the average positive return is 1%, while the average negative return is 50% or more. If each quarter a percentage of the losers blow their accounts and leave trading, then the next quarter maybe some of the losers were winners from the previous quarter.

The 5% is over the lifetime, and I believe it, because every person I've ever met in real life that has traded has blown their account and given up. There are so many people who try to trade the forex markets, how many honestly successful (consistently successful) traders have you met?

Cory
Most suspicious statistics I have seen in a while. Too much lack of important data to open your bottle of Champagne.
Measure twice, cut once
For some real statistics;

http://www.forexfactory.com/showthread.php?t=20253
Measure twice, cut once
Quoting Razorman
i think the 5% applies in the long term. The figures they are showing can br very misleading when you don't know the length the acc has been opened for and how many trades have been executed.
I would agree with that.
Quoting DKallDAY
The law reduced margin trading down to 50:1 right? I don't think any responsible trader would even use leverage as high as 50:1. I don't think I've ever used a leverage more than 5:1 to stay within my boundaries for a safe amount of risk.
Lots of traders take advantage of the higher leverage to increase their buying power (to be able to purchase more lots for a smaller account balance). I am placing the same trades I was a month ago, only now I have to keep 8 time more in my acount to do it. A person's trading style determines if higher leverage is a benefit, a hinderance or moot to them. Margin requirements have no impact on whether a trader is successful or not, it just limits their options. I just think many people would like to have that option even if they don't use it frequently.

You are doing well, since at 5:1 margin, to trade 5 full lots, you would need something over $100K in your account...just remember that not everyone has that kind of money, so the higher leverage allows people with lower balances to trade more lots, and hopefully, make money faster. If you start with $10K in your account and buy one lot, regardless of the margin, a 15 pip stop loss being hit only reduces your account by $150...the only time 50:1 or 400:1 come into play is determining how many lots a person does buy, not necessarily can buy. Now if that person buys 10 lots instead of one and the same 15 pip stop loss is hit, he reduces his account by $1500, which can be a substantial difference. But turn it around and if they both make 15 pips rather than lose it, it becomes $150 profit versus $1500 profit. It just depends on the risk someone is willing to take based on experience and trading method.

I certainly don't think everyone uses high leverage, or should for that matter. But I think that there are lots of people that at least would like the option, and they will have to go outside the US to get it. If the CFTC ever goes to 10:1 leverage (and we probably will), trading 20+ lots will be a thing of the past for most people in the US.

I just think we may see a drop in numbers of total accounts over the next couple of quarters as people that still have a choice move away from US brokers.

Just my 2 pips.....
Quoting moneymaker2
You are doing well, since at 5:1 margin, to trade 5 full lots, you would need something over $100K in your account...just remember that not everyone has that kind of money, so the higher leverage allows people with lower balances to trade more lots, and hopefully, make money faster.
Point is that if you can make money faster, you can also lose it faster. As you stated earlier about trading 20 lots with an account balance of $10,000, a 5 pip loss would instantly put your account balance down 10%. Get a low stop of 15 pips and there goes 30% of your account balance. Two more losing trades and the game is over. That is not proper money management for an account and inheriting that type of risk is irresponsible. If an investment firm did that in the US? Traded on borrowed money with that much known risk? They would be investigated immediately.

Quoting moneymaker2
But turn it around and if they both make 15 pips rather than lose it, it becomes $150 profit versus $1500 profit. It just depends on the risk someone is willing to take based on experience and trading method.
That's an if statement with what you're saying is a 1:1 risk/reward, not even worth taking a trade like that. Theoretically you could turn $10,000 into a trillion in a matter of months. There's a guy that started that thread that wants to make 9% of his account balance a day, but I showed him the math and that means with starting with $10k he would expect to have $30 billion after a year and making $3 billion on his 1st day of the 2nd year.

Quoting moneymaker2
I certainly don't think everyone uses high leverage, or should for that matter. But I think that there are lots of people that at least would like the option, and they will have to go outside the US to get it. If the CFTC ever goes to 10:1 leverage (and we probably will), trading 20+ lots will be a thing of the past for most people in the US...
If you are successful at trading 20+ lots with a low account balance of say $10,000, then you would be within even a 20:1 or 10:1 margin to make those trades in no time.

If you don't manage your losses, your gains don't mean a thing. There's a reason why many people in FX say "don't risk more than 1% of your account." Trading 100:1 margin on a $10k account puts that 1% at a 1 pip stop loss and a measly 10 pips at 10%. Imho, those people deserve to lose haha.

I don't even know why I care so much? It doesn't even affect me, hahaha. This is like that "winning an argument on the internet" picture.

It's all good.
Quoting DKallDAY
If you are successful at trading 20+ lots with a low account balance of say $10,000, then you would be within even a 20:1 or 10:1 margin to make those trades in no time. There's a reason why many people in FX say "don't risk more than 1% of your account." Trading 100:1 margin on a $10k account puts that 1% at a 1 pip stop loss and a measly 10 pips at 10%.
I think there may be a slight misconception of how margin affects an account....but like you said, I don't even know why I care so much any more, since we are limited to 50:1 now anyway.

Good trading.....
Here is what I wrote in my blog about the subject:

Common belief is that 95% of retail forex traders lose their shirt. Out of 100 that try to become profitable in forex trading, only 5 succeed and 95 have lost –all- their money. A sobering statistic.

IBFX, one of the larger retail forex brokers, recently released statistics on the profitabiliy of accounts held by their brokerage. It does not make good reading.

http://tulipfx.com/wordpress/wp-cont...fitability.png

What you can see at first glance is that just under 30% of accounts are profitable. But is that figure at odds with the 5% profitable traders which is the common belief?

I would suggest it is not. Consider this: if you are unprofitable over an extended period you’d exit the market and quit trading forex. If you are profitable you would of course continue.

The data from IBFX shows roughly 30% of accounts are profitable for each period. Of the approximately 17,500 accounts each period that would make 5,250 profitable. Let us assume that those profitable accounts continue, while losing accounts are closed out, to be replaced by new accounts.

The total accounts over the period surveyed is 70,101. Out of those, only 5,250 of those are profitable.

In my reasoning this would mean over that period about 7.5% of total accounts are profitable, not far away from the common belief that 5% of traders being profitable.

US brokers under the new laws have to disclose how many of their accounts are profitable and unprofitable. Stating that only 7.5% make money would not be good marketing, so perhaps IBFX have structured the figures in such a way to make it appear that more of their accounts are profitable than actually are.
I don't really know why people get so wrapped up in it. 5%, 10%, 50%...does it actually matter?

What is in no doubt is that there are people who think that they can get rich in a flash in FX and most of them will lose or their money trying - usually in a very short period of time. Then there are the rest, a mish-mash of new traders trying to make it long term, long term strugglers, long term break even traders and those who deliver some sort of profit. There is also a small group of traders who are doing amazingly well and have been for some time. They're the one's that 95% of traders tell you don't exist (but they do).

The only important thing to know is that if you are dedicated enough, want it enough and are skilled enough, there isn't one single thing in your way. Not the market, not your broker (by and large) and not your government (there are always options if they interfere too much).

To be one in twenty, when you know how many people don't really put any effort in at all, are odds i'm entirely comfortable with. If it turns out that the odds are even greater in my favour, so be it but it'll not change anything that I do.
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