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Why Traders lose money and how to start being consistently profit

  • #1
  • First Post: Edited Nov 10, 2020 8:07am Nov 6, 2020 7:51pm | Edited Nov 10, 2020 8:07am
...The vast majority of retail traders lose money for one or more of the 3 reasons cited below, and they are nothing to do with big bank/institutional money conspiracies against the retail trader! They are:

1. They don't know what a trading edge is, what you need to know about one to maximise your money and risk management to it, and generally they don't have one anyway. Ie - they don't have the recorded empirical evidence of an edge they feel theoretically has potential, over a large forward tested representative sample in the market conditions it is suited to and that they should therefore only trade it in. Only this will prove that such an edge may exist or not. A lot have a second hand edge (bought from a dodgy vendor with promises of instant wealth or picked up from a forum or something,) -or- some flimsy anecdotal/observational evidence but over a small unrepresentative sample, about an edge they think they have found and may exist.

2. They are generally underfunded re margin relative to the unrealistic profit targets they need to make trading a worthwhile activity, at the opportunity cost of something else with their time/money. They are therefore generally over-leveraged for the 'edge' they are trading assuming they have one, and this is related to point 1. above re not knowing the critical stats about the edge's performance in order to optimise money and risk management to it.

3. They never develop the necessary psychology to trade the edge they are using, profitably. This leads to mistakes and ill discipline that ultimately results in losses.
Trader with an Edge.
  • #2
  • Nov 7, 2020 2:34pm Nov 7, 2020 2:34pm
Quoting Headland
...The vast majority of retail traders lose money for one or more of the 3 reasons cited below, and they are nothing to do with big bank/institutional money conspiracies against the retail trader! They are: 1. They don't know what a trading edge is, what you need to know about one to maximise your money and risk management to it, and generally they don't have one anyway. Ie - they don't have the recorded empirical evidence of an edge they feel theoretically has potential, over a large forward tested sample size in the market conditions it is suited...
I, as an overambitious fool who is losing money, would rather keep pursuing extreme returns, and need to do so because xx% yearly returns are insignificant amounts in my circumstances. I have, however, come to realize that I do need to define a plan for each trading day, including entry levels or conditions, what invalidates the prediction and what to do then, how much to put in position, even a work routine including re-checking the charts for the known signs and even when and how long and to sleep or take a break.

Not having a plan leads to confusion, second guessing, being overly focused on one time frame and missing important signs. Ultimately it leads to emotional decisions which is how most money is lost.

Keen study of the way price moves, how price progression is halted and reversed with what must be huge volumes seemingly intervening out of nowhere, along with some critical reflection, leads to the conclusion that forex is fully manipulated. This is a reality that goes completely under the radar to the stat-edge-EA retails such as yourself. Contrary to what you believe, price movement is exactly directed to induce and exploit emotional trading and take out retail stops at obvious levels.
Practitioner of the cryptic trading arts
  • #3
  • Edited Nov 10, 2020 8:04am Nov 9, 2020 8:39am | Edited Nov 10, 2020 8:04am
I'll deal first with what a Trading Edge is, -and- is not and for this I am using a presentation that was delivered by the trader BBMac who used to post here and @ T2W. I I attended a talk given by him in 2011 and he posted it on the boards then. He hasn't posted for years now so I hope he won't mind me replicating some of his work here.

A Trading Edge is a repeating circumstance or set of circumstances (ie a set-up or combination of set-ups comprised of whatsoever variables) that suggest a greater probability of one thing happening over another, based on historical precedent over a large representative sample size to that point in time. Additionally and/or alternatively; if the edge does not suggest a greater probability of one thing happening over another, then based on that sample, it suggests that more gain is available when it succeeds than when it fails, sufficient to realise a net gain over any given future sample.

That is it...as simple as that. What a trading edge is not is predictive. How can it be? None of us have no access to all market participants' trading plans, and even though our edge may have set-up, every moment in the market has a very high probability to almost certainty of being unique, comprised of different buyers/sellers trading different volumes, for different reasons/objectives than the last time the Trading Edge set-up. So how can we possibly predict with any degree of accuracy what will happen next. If anyone believes that their edge is predictive, they are kidding themselves, and possibly worse - others.
Trader with an Edge.
  • #4
  • Edited 9:19am Nov 9, 2020 8:40am | Edited 9:19am
Quoting Endoephemera
{quote} I, as an overambitious fool who is losing money, would rather keep pursuing extreme returns, and need to do so because xx% yearly returns are insignificant amounts in my circumstances. I have, however, come to realize that I do need to define a plan for each trading day, including entry levels or conditions, what invalidates the prediction and what to do then, how much to put in position, even a work routine including re-checking the charts for the known signs and even when and how long and to sleep or take a break. Not having a plan leads...

It would be in-elegant and superfluous to offer a reply to your post when you amply demonstrate yourself why you will continue to lose.
Trader with an Edge.
  • #5
  • Nov 9, 2020 9:00am Nov 9, 2020 9:00am
Next, I'll deal with what you need to know about your Trading Edge.


You need to know how it performs/behaves over a very large sample of times it has set up. (I'll deal with this point more in a separate post - ie what constitutes a large 'representative' sample relative (in technical trading) to the t/f (s) you are trading.

ii. Know it's overall winning strike rate (winning trades as a % of total trades, at your minimum r:r ratios,) across any given sample size

ii. Know it's typical winning strike rate

iii. Know it's typical/max distributions of wins/losses, ie;
a. It's actual longest consecutive losing run of trades experienced
b. It's likely longest consecutive losing run of trades over any given future sample size (the probabilities.)


If your trading of it begins to fall outside of the typical - maximum distributions - this is a danger sign !

Either:

1. You are not employing it correctly, ie typically not holding the winners for the r:r needed to make it profitable.
-or-
2. Your Trading Edge may not be working anymore, typically because the market conditions currently being experienced are different/were not replicated in the sample to date upon which your information about it is derived.

The screenshots below show the likely maximum size of a consecutive losing run of trades at the strike rate as well as the probabilities of a consecutive losing run of trades given the strike rate, across the sample sizes given.
Attached Image(s) (click to enlarge)
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Trader with an Edge.
  • #6
  • Edited 8:37am Nov 10, 2020 7:56am | Edited 8:37am
Before I get into the mechanics of how to use the information in the post above in respect of risk and money management that is optimised to your edge (in a seperate post,) let me first of all remind the thread of what the excellent Mark Douglas, (author; Trading in the Zone, The Discipliner Trader etc....) calls his fundamental truths of trading and his principles of consistency. These are key to understanding what an edge is, and implementing it correctly.



The 4 Fundamental Truths of Trading:

1. Anything can happen.

2. You don’t need to know what is going to happen next to make money.

3. There is a random distribution between wins and losses for any given set of variables that define an edge. (ie; we don't know which of our individual set-ups will produce a win or gain - all we know is that over a sample we will realise a gain, provided we implement the edge correctly.)

4. Every moment in the market is unique

Ie: Trading a proven edge correctly is the only way to realise a consistent profit from it. Mark Douglas calls it the 'profit gap' ie the difference between theoretically having a proven edge and realising a profit from it. The principles of consistency below deal with this.


The 7 Principles of Consistency:

1. I objectively identify my edges.

2. I predefine the risk of every trade.

3. I completely accept the risk or I am willing to let go of the trade.

4. I act on my edge without reservation or hesitation.

5. I pay myself as the market makes money available to me.

6. I continually monitor my susceptibility for making errors.

7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.

Trader with an Edge.
  • #7
  • Nov 10, 2020 10:16am Nov 10, 2020 10:16am
Quoting Headland
{quote} It would be in-elegant and superfluous to offer a reply to your post when you amply demonstrate yourself why you will continue to lose.
I wish you the best of luck in your investing endevours and many clients, chump.
Practitioner of the cryptic trading arts
  • #8
  • Nov 10, 2020 10:59am Nov 10, 2020 10:59am
Quoting Endoephemera
{quote} I wish you the best of luck in your investing endevours and many clients, chump.
Good Luck to you too....and for the record - I am an ex bank trader who has traded his own account for 17 years, profitably. I have no clients, and I am not looking for any. There is nothing for sale here. Simply sharing my learning.
Trader with an Edge.
  • #9
  • Nov 10, 2020 9:02pm Nov 10, 2020 9:02pm
Quoting Headland
{quote} Good Luck to you too....and for the record - I am an ex bank trader who has traded his own account for 17 years, profitably. I have no clients, and I am not looking for any. There is nothing for sale here. Simply sharing my learning.
Hi Headland
Thanks for sharing your views on the Edge. Apart from the statistics and the theory from Mark Douglas, can you also share your insights on your entries and exits please? Honestly being curious, how the experienced bank traders trade.
What is the leverage you take?
The R:R
What is your average profit target for the year and what is the actual you achieve.
On what strategy you enter and exit
Thanks
  • #10
  • Nov 11, 2020 2:07am Nov 11, 2020 2:07am
Hello, what percentage return % would be average per week/ month once your consistent?
  • #11
  • Edited 3:57am Nov 11, 2020 3:33am | Edited 3:57am
Quoting vinforex7
{quote} Hi Headland Thanks for sharing your views on the Edge. Apart from the statistics and the theory from Mark Douglas, can you also share your insights on your entries and exits please? Honestly being curious, how the experienced bank traders trade. What is the leverage you take? The R:R What is your average profit target for the year and what is the actual you achieve. On what strategy you enter and exit Thanks
Hi, I will be publishing more stuff over the coming days/weeks in relation to the main subject of the thread. I don't want to make this thread about my own edge but I will answer the questions you raise.

As for my entries and exits - The entries are based around a technical edge developed around the underlying principle of technical confluence. Whilst I will not be detailing the exact repeating set-ups that form part of my edge here - suffice to say they revolve around reversals against trend, and entries to trend after a pullback - both at pre-identified areas of potential support or resistance. The exits are based purely on targets for each set-up not on technical or other factors.

I trade very differently working for myself to how I did at the Bank and Hedge Fund I worked for . In both I was effectively a short-medium term global macro (fundamental) prop trader but because I knew some stuff about tech analysis I could better time my entries. On my own a/c my edge is purely technical.

Re leverage, again I will go into more detail about this subject generally, and specifically how to optimise it to the edge you are trading in forthcoming posts. but re my own trading - the leverage I use is conservative and optimised to my own edge's performance stats. The most important thing is to 'stay in the game' - ie preservation of capital - only when you have learned to do this can you actually grow the capital.

Re targets, my 2hr+ individual trading session objectives are

a. + 20pips or 30% of pip range traded whichever is the greater
b. +7.5pips / hour average gain or +20pips in a minimum 2hr session whichever is the greater.

As for the leverage I employ - it differs with each set-up (some are higher probability than others so it makes sense to risk more on these ) but it is a max of 10:1. I work 38 trading weeks a year (14 weeks hols) and I make a good living.
Trader with an Edge.
  • #12
  • Nov 11, 2020 3:35am Nov 11, 2020 3:35am
Quoting asset21
Hello, what percentage return % would be average per week/ month once your consistent?
Hi, this all depends on the hours you trade, the strike rate of your edge and the R:R and leverage you employ - it is impossible to say without knowing these variables, and they will vary from edge to edge.
Trader with an Edge.
  • #13
  • Nov 11, 2020 5:30am Nov 11, 2020 5:30am
I like this thread, once you have a mechanical system, and define your edge on the market, you can see that you will either have a negative or positive expectancy.

I cut out the numbers but here are the statistical probabilities using an equity curve simulator using my own track record.

Subscribed and looking forward to future posts from you @headland.
Attached Image
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  • #14
  • Nov 11, 2020 6:07am Nov 11, 2020 6:07am
Profit is profit! Consistency is what matters more!
  • #15
  • Nov 11, 2020 6:31am Nov 11, 2020 6:31am
Very intersting thread. Looking forward to your thoughtful contributions.
---subscribed---
  • #16
  • Edited 8:56am Nov 11, 2020 7:37am | Edited 8:56am
So, in the posts above I've dealt with what a Trading Edge is ,and is not, and what you need to know about it in order to give you the best chance of trading it successfully. Now I'll deal with why you need this information, and then in a separate post - what sample size could be considered representative on each time frame you may trade..

First, once you have a trading edge proven over a forward tested (not back tested) representative sample...you need to maximise your risk and money management to it whilst still being conservative. As I say in my reply to a post above above, your 1st priority as a trader is to protect your capital. The tasks you face are as follows and in this order.

1. Protect your capital
2. Grow your capital
3. Learn from each trade you make and get better.

For the sake of example let us say you have an Edge with the following stats:

Winning strike rate: 65%
Typical winning strike rate (over smaller sample sizes) 61%
Typical distribution of consecutive winning trades: 6
Maximum distribution of consecutive winning trades 12
Typical distribution of consecutive losing trades 4
Maximum distribution of consecutive losing trades 5

So, this is what you have experienced trading it. In your current trading sample or next one the probabilities (see tables posted above) @ your current typical strike rate are as follows:

37.7% of seeing 5 consec losers, 16.9% chance of 6, 7% chance of 7 etc etc....and a most probable maximum consec losing trades of 5.

Risk & Money Management

What size of drawdown would be unsettling for you ?

Here's the thing...when in a trade it is common to experience discomfort and the body communicates that to our brains, resulting in the all too common response to ending that discomfort...by exiting the trade early. (Our body reacts to perceived dangers by preparing to 'Fight or Flee.' )


In trading a lower strike rate Trading Edge there are naturally more losing trades and crucially more and longer consecutive losing runs.

Our brains remember past losses and irrationally place more emphasis on them than the winners, resulting in it fearing more losses to come.

It's mechanism to protect us from this discomfort is to secrete adrenaline and noradrenaline (which comes from the adrenal glands above the kidneys.)

The release of these hormones results in the body increasing the flow of fatty sugars through the liver which causes the feelings of discomfort resulting in a much decreased ability to make objective judgements

'..Your Neo-Cortex (the thinking part of your brain) shuts down and the survival mechanism in the middle and lower more primitive parts of the brain take over. As a result you react to things and stop thinking things through rationally. Basic emotions like fear and anger take over from more complicated sophisticated higher function emotions.'

So our ability to adhere to strict risk:reward ratios necessary to ensure overall net profitability with a lower strike rate system, is severely impaired with the greater number of losses and consecutive losses with this type of trading edge.

The greater the consecutive run of losses the greater the impairment, and again, crucially, the less experience/understanding one has of this, the greater the discomfort one might experience resulting in non-adherence with the critical risk:reward ratio.

Further to this, such a consecutive run of losing trades can also interfere with the ability to actually place the next trade when the trading edge presents itself, fearful of further losses, thus interfering with the natural flow of probability upon which all trading edges rely.

So, even assuming you can cope with all this and trade your edge properly, the size of drawdown you are 'comfortable' with will be a big determinant in optimising your risk and money management to it and not let the trading of it destabilise you psychologically.

Continuing with the example given above; Although (per the table) the most likely maximum consecutive run of losing trades is 5, there is a 1.1% chance of 9, so you have to accommodate this in your risk and money management too.

If say 20% is the most drawdown (hereinafter referred to as dd) you can tolerate then it will no good trading at 5% per trade risk as there is a likely chance of a 25% dd, [5 x 5%,] and although a small , a 1.1% chance of a 9 x 5% dd = 40%. So be conservative in your risk management and set your risk per trade to accommodate that 1.1% risk of 9 consecutive losers, so a 2% risk/trade would be more appropriate. (9 x 2% = 18% dd.)

Remember too that the 'rate of recovery' needed to recover capital as outlined by the table below, grows exponentially. (ie in drawdown your starting capital decreases - so the % of your remaining capital you need to recover to get back to the starting amount.)

Use these tables to help you determine whether your edge is performing normally and within the parameters of reasonable probability

More to come......
Attached Image
Trader with an Edge.
  • #17
  • Nov 11, 2020 8:21am Nov 11, 2020 8:21am
Risk and Money Management cont....

Conventional trading wisdom has it that we should aim to keep our average winner larger than the average loser, over any given sample of trades and thus achieve a positive expectancy. Indeed some even go so far as to suggest not including the biggest winner across the sample taken, in that equation and then see-ing if the average winner is still bigger than the average loser. (ie take out what Malcom Gladwell would call the 'outlier' - ie the exception that screws/falsifies all the averages.) Whichever way you look at it you can see the logic and it is sound advice.

The risk:reward equation becomes more crucial the lower the strike rate of your Trading Egde, (ie the lower the winning trades as a % of total trades.) We all know that even a 25% strike rate can still result in a net profit over any given sample provided the right risk:reward ratios are adhered to.
Trader with an Edge.
  • #18
  • Nov 11, 2020 8:32am Nov 11, 2020 8:32am
Whatever works for you

Re your trading edge:

* Whatever is working for you is generally the right way to trade

* There are few absolutes in trading, there is no right way or wrong way if it is working for you-consistently.

* You should develop your Trading Edge for you - to suit your needs, preferences, tolerances, and personality type

* Any Trading System or Methodology obtained from a third party, should really become a template you to take the bits that you want and develop your own unique Trading Edge.

* If technical trading - seek the highest possible degree of confluence and insist on nothing else.

* Stay engaged with the instrument (s) you are trading.

* Shortcut/don't complete any of the steps necessary to stay appraised of the market you are trading, or otherwise compromise your active engagement with this market before or during your trading session and you handicap your chances of making the most informed decisions about the trades you are entering.

* There is a positive correlation between preparation and long term consistent profitability.


A Trading Edge can put the odds in your favour. You can ensure that you only enter the market when the highest degree of probability of a successful outcome is present.

Such a Trading Edge can point to the greater probability, whether or not that greater probability plays out.

With risk and money management optimised to the strike rate and distribution of the Trading Edge a net gain can be realised over any given sample of times it sets-up.


'.....You do need to have an edge; you need the consistency to replicate that edge; .... success is measured in consistency, not in the ability to make occasional big scores…’ Brett Steenbarger

Trader with an Edge.
  • #19
  • Nov 29, 2020 11:51pm Nov 29, 2020 11:51pm
A large number of traders lose their money because they can’t keep control over their emotions. Other things come second.
  • #20
  • Nov 30, 2020 2:33pm Nov 30, 2020 2:33pm
Because they deposit a little money as start-up capital and then earning 50 or 100% a month is not enough for ambition, blow up account.
They deposit big money as start-up capital and simply lose self-control.
Knowledge, edge, is the smallest problem, it takes several years of effort.

The solution : a specific type of personality that can cope with what is written above, the others lose.
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