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The Reason why 95% Traders fail

  • #201
  • Dec 26, 2009 5:13pm Dec 26, 2009 5:13pm
Quoting steveshelby
Do you have the answers? Are you at liberty to share?
I don't believe that there are perfect answers, in the sense that, at the very best, trading involves approximation. The obvious (and generalized) answer is that a trader should enter when his analysis tells him that price is more likely to move in one direction than the other, and that he should exit when his analysis tells him that that's no longer the case. I elaborated on this back in post #125 (summarized in the last two paragraphs there).

My refutation of the arguments I alluded to, are as follows:

"Exits are more important than entries because Van Tharp (or some well known author) says so".
Explanation here.

"Exits are where you close the trade and bank the money".
P/L is the difference in pips between entry and exit. Mathematically, entry has just as much bearing on P/L as exit.

"Two traders enter at the same level, one buys and the other sells. Both can profit, depending on how they exit; therefore entry is inconsequential, and exit is key".
This is true only if neither trader uses stoplosses (see my comments below on floating losses). If both use stoplosses an equal distance from the entry level, then one who made the 'poorer' choice of entry will likely get stopped out before the other.

"If you exit every winning trade when $20 ahead, and every losing trade when $10 down, it's obvious that you'll win in the long run".
This doesn't take win rate into account. Everything else being equal, taking 2:1 RR trades will result in twice as many losses as wins (actually more, if we consider costs).

"You can enter anywhere, because if you hold onto any floating loss long enough, it will eventually return to profit".
...... or you get margin called, whichever happens first. The idea that "a loss is not a loss until the trade is closed" is very dangerously flawed. Floating losses are very real.

"It's impossible to predict price, therefore entry doesn't matter, and the only way to profit is through your exits".
If it's impossible to 'predict price', or at least act on the balance of probability, then it's impossible to gain an edge from either entries or exits.

More thoughts on entries, exits etc:
http://www.forexfactory.com/showthre...77#post1452677
http://www.forexfactory.com/showpost...511#post198511
http://www.forexfactory.com/showthre...01#post3113701
http://www.forexfactory.com/showthre...22#post2444822
http://www.forexfactory.com/showthread.php?t=71674
  • #202
  • Dec 26, 2009 5:39pm Dec 26, 2009 5:39pm
Thank you, Hanover. I also replied in your coin toss thread.
  • #203
  • Dec 27, 2009 2:24am Dec 27, 2009 2:24am
I definitely agree with the fact that exits are at least as important as entries. To my mind, I'm nearly sure exits are more important than entries.

I've been trading for nearly two years the FX market, and how many times did I let winning trades turn into losing trades ? So many times...
They say "Cut the loss and let the profits run". But of course, profits can't run for ever !!!!! Happens a day when they "run back"...

Even if you find out the right moment to place a trade (thanks to luck maybe ? because no one knows where the market will go), and even if your trade is profitable, GREED can turn the heaven into hell... But it's not because of fate, that's just because of the trader himself !!!

Then one day, we come to think the only way to survive is to manage the risk and the money.
And then, we begin to give up the gambling thoughts.
And then, we begin to learn what is really trading...
And then we become more humble.

That is my experience, a gambler who has kneeled because of greed and fear.

Best wishes for the new year to all of you...
  • #204
  • Dec 27, 2009 8:16am Dec 27, 2009 8:16am
Quoting Rocker
And then, we begin to learn what is really trading...
Many allude to "what trading really is" but I have not seen anyone state "what trading really is".
  • #205
  • Dec 28, 2009 3:44am Dec 28, 2009 3:44am
I meant "...what trading really is..."
that's to say : money management...
  • #206
  • Dec 28, 2009 4:15am Dec 28, 2009 4:15am
Quoting Turveyd
The answer is in my signature!!!

Forum's will ruin the world.
I think we should not put an equal sign between the forum and the loss.

Forum is merely a tool for learning and I do believe that Forum is a great way to interact and learn from each other.

I do agree with you that we should not rely on Forum information to make final trading decision, I think the main reason is that many people misuse the forum instead.
  • #207
  • Dec 28, 2009 6:16am Dec 28, 2009 6:16am
Test
Sentiment: Short on cash. Long on hope.
  • #208
  • Dec 28, 2009 6:25am Dec 28, 2009 6:25am
Quoting Tjpld
... they attach to much importance to "Trading Systems".

http://img706.imageshack.us/img706/4343/wuehltisch.png
if your statement holds true, then all the PRO 5% of the trading community are in commodities and stocks then? or are they are the members" lounge?
enough of the noob bashing. what would u expect a new trader to do when he opens his trading platform? toss a coin, heads go long, tails go short? then with perfect MM, mentality, psychology and Discipline, he should thus earn money?
every1 needs a system. U people trade with a simple or complicated set of rules that works for you. this set of rules IS a system. so stop blasting people who share their systems. or are the pros here trading with a coin/dice?
  • #209
  • Dec 28, 2009 7:42am Dec 28, 2009 7:42am
Quoting yunielescaz
if your statement holds true, then all the PRO 5% of the trading community are in commodities and stocks then? or are they are the members" lounge?
enough of the noob bashing. what would u expect a new trader to do when he opens his trading platform? toss a coin, heads go long, tails go short? then with perfect MM, mentality, psychology and Discipline, he should thus earn money?
every1 needs a system. U people trade with a simple or complicated set of rules that works for you. this set of rules IS a system. so stop blasting people...
I see your point. Problem is that the majority of the "noobs" go to the TRading Systems without having a clue on what is "MM, mentality, psichology and discipline", as you stated. It comes with extensive reading and charting time..
Many share my views with me. But I don't share them with them...
  • #210
  • Dec 30, 2009 3:13pm Dec 30, 2009 3:13pm
Quoting Tjpld
... they attach to much importance to "Trading Systems".
Yeah, I'm sure that you're right but taking trades based on Call Thread participation is probably right up there - oh, I'm sorry - "Interactive Trading". LOL!

BTW: Where is the "Understanding the Forex Market and Its Participants" forum?
I must have overlooked it.
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  • #211
  • Dec 31, 2009 6:52pm Dec 31, 2009 6:52pm
The reason why 95% of traders lose is because 95% of traders trade the same way. They do not know of the concept "market neutral". The 95% take each trade individually. They do not think in terms of portfolio management rather they are thinking about trade management. They see each trade as win or lose and do not see a trade as part of a larger picture.

There are a few threads, maybe 5%, that do "basket trading" or "hedging". Do not infer that these threads contain the answer. However, you may want to do further study along these lines.

Think of a see-saw. When one side goes up the other side goes down. If you are long a unit of one currency and short a unit of another, there will be a balance point. At some time in the future, as you attempt to maintain the balance, the see-saw may tip in such a way for you to exit all positions and net a profit. When properly executed, you won't have to worry about margin calls. I would wager that 95% of traders do not trade like this.
  • #212
  • Dec 31, 2009 6:56pm Dec 31, 2009 6:56pm
I anticipate the question "what is market neutral"?

What Does Market Neutral Mean?

A strategy undertaken by an investor or an investment manager that seeks to profit from both increasing and decreasing prices in a single or numerous markets. Market-neutral strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and decreasing the return from broad market movements. Market neutral strategists may also use other tools such as merger arbitrage, shorting sectors, and so on. There is no single accepted method of employing a market-neutral strategy.


Investopedia explains Market Neutral

Managers who hold a market-neutral position are able to exploit any momentum in the market. Hedge funds commonly take a market-neutral position because they are focused on absolute as opposed to relative returns.
  • #213
  • Dec 31, 2009 7:17pm Dec 31, 2009 7:17pm
Quoting hanover
I don't believe that there are perfect answers, in the sense that, at the very best, trading involves approximation. The obvious (and generalized) answer is that a trader should enter when his analysis tells him that price is more likely to move in one direction than the other, and that he should exit when his analysis tells him that that's no longer the case. I elaborated on this back in post #125 (summarized in the last two paragraphs there).

My refutation of the arguments I alluded to, are as follows:

[color=Blue]"Exits are more important...

A good post
  • #214
  • Dec 31, 2009 7:28pm Dec 31, 2009 7:28pm
Quoting kenkomo
A good post
Yes, it is.
  • #215
  • Jan 2, 2010 5:37am Jan 2, 2010 5:37am
Quoting hanover
Are you willing to explain how?

The way I see it, there are two ways of profit exit: profit targets and trailing SLs.

If we use profit targets..........

(1) Statistical approach - by simply taking profit at 1R, 2R, 3R etc. We can try to optimize the R-value by testing, but I see that as being prone to curve-fitting, in the same way that optimizing indicators for entry is likewise. The market doesn't really care whether a tiny retail trader is entering or exiting. Higher R-values will increase overall average win size, but will decrease...
From my point of view profit targets have some serious drawbacks.
Since in the market anything can happen at anytime ( which doesn't mean they move random ) it would be unwise to cut yourself of from the endless opportunity flow. You HAVE to maximize some of you trades just to compensate the inevitable losses. Since RR alone doesn't guarannte longterm sucess it does make much sense to take profit at excatly 1R 2R or 3R.
I agree with you that RR is to some degree inverse correlated to your win rate but of course thats how traders make money. When the trade has a greater proababilty to go in to your direction than what your SL/TP Ratio would imply your going to make money.

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(2) Technical approach - by taking profit at predetermined points of likely reversal, e.g. S/R.
Of course this makes perfect sense. When the trade is likely to go against you and you will give away profit which is bad. But again you cut yourself of from the endless opportunity flow of the market. How often did you expect a Level to act as support only to to see it getting broken? Probably often enough so it's worthwhile to to take advantage of the possibility that your SR get taken out. Someone could take X% of his profits or narrow in his Trailing Stop and let the rest run.

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(3) Dynamic approach - by allowing the market to tell us that the trade might be about to reverse, e.g. a stalling pattern, as the trade evolves. This is essentially discretionary.
Again anyting can happen. It can take just one trader to make the market tip over and break through SR levels.

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If we use trailing SLs..........

(4) Statistical approach - trail the SL at X pips, and use testing to optimize the value of X. Again, I see possible dangers in curve fitting. The wider the SL, the more room price has to move, increasing the probability of attaining 'home run' trades, but the more profit that is forfeited on every trade (some winning trades could even become losses) as price retraces to the wider SL.
When you trail by X Pips there is no relevance in your SL. Your stop should always prove your trade wrong.

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(5) Technical approach - for example, advancing the SL to lock in profit each time a point of likely reversal is reached.
This in my opionen the most logic approach. If it takes out your stop behind a swing high in a short trade it proves you wrong that the market will head lower. Of course this is highly discreationary which doesn't have to be a bad thing rather the opposit. If systematic exits would provid an edge everyone could do it. Trailing a trade is simple but not easy. If you master it you will make profit by putting your winning trades in favor. Hitting a golfball is simple but not easy. Everyone can hit a ball with a little bit of training but that does not make him Tiger Woods.

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Scaling out..........
Scaling out in itself doesn't really offer an edge, because all we are doing is effectively running multiple trades, whose overall P/L is nothing more than the sum of each component trade. It is actually nothing more than a 'diversification' process that will ultimately reduce itself to a mean, i.e. there will be (a) occasions when it would have been better to let all of the position ride as far as possible, and (b) occasions when it would have been better to take all of the profit early. If we can...
Totally agree here.

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Moving SL to breakeven.........
Unless there is some kind of overwhelming statistical backing, I don't believe that this provides an edge, because the market doesn't care where the small retail trader entered. It is merely comforting the trader that the current trade can no longer end up in loss. Move SL to BE too early, and we end up truncating potential winning trades; too late and our losing trades will be more frequent, and our losses larger. Again, I see that as prone to the dangers of curve fitting.
Of course this is discreationary too which is excatly why it's the best way.
If playing golf like a pro would be just about hitting the ball in anyway we would all be doing it. If perfect exits would be only about exiting on a MA cross eveyone would do it. Stops are of course a very importatnt part of exiting by again putting your winning trades in favor. And this way makeing it easier to compensate your losses by keeping them small. If maximizing winning trades is about compensating inevitable losses. Setting a perfect stop is about minimizing your losses to compensate for the inevitable lack of winning streaks. If you belive that when price reaches 1.0000 the market will become bullish and prove your short trade wrong why waste another 10 pips or more on it to give it "room to breath"? For my self I like to set Stop&Reverse Orders because when you get out of a short trade without believing price will go up from where your stop is why exit in the first place? If you get stopped out just to see price moving in the opposite direction that means you did not put any relevance in your stop. A stop should always prove you wrong when triggered.

Even when your Stop&Reverse gets double stopped out from my experience there are more than enough cases where you are happy to be out of a losing trade but most don't take advantage of the potential gains in the opposit direction. Why because they focus to much on their current trade and don't keep their minds flexible.

As for setting Stops to BreakEven the biggest advantage I see here is not just keeping our losses small but allowing the trader to trade in a completely carefree state of mind which will keep him from making the usuall trading errors like getting out to early without maximizing their profits. If you look at it this way it provides a significant Edge, a mental one.
Personally I set my Stop to BE after the first retrace. This will ensure that that I'm out of a trade when the market shows signs of of an Uptrend (higher Highs) while I'm short.

The fact is that there is no proven recipe like always trail by 30 Pips on EUR/USD. Recipes are products of the way we explain our world. A ball dropped from 1 Foot high should always reach the ground after the same time. If our formular doesn't predict the outcome of our experiement everytime it's rubbish from an academic point of view. That's why most
look for recipes to trade the market because they expect the same outcome
if the make the same trade in the future. The market doesn't work that way.
You never now how many and who is waiting to enter the market with which intentions you can never make the same trade twice so recipies will not work unless you always put in just the same ingredients.

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IMO it's self-evident that 'knowing when to exit' will give us an edge. In hindsight everything is obvious, but of course we must make our exits in real time. So unless we can establish a statistical method that has a large enough margin for error to rule out 'over-optimization', or otherwise somehow exploits recurring inefficiencies in price behavior, our exits have no real edge. In fact, exactly the same logic applies to entries. As Merlin once pointed out (sorry, I can't remember the link), exit is nothing more than the mirror image of entry....
I would disagree with exits beeing nothing more than the mirror side of our entries although I know that my Stop and Reverse Approach is excately that.
If you watch price action you will find endless opportunites to make a trade that doesn't mean you have to take them or that you have to close your open trade you put on some kind of hedge. I traded the EUR/USD Short after the last NFP report for several days. Even though I anticipated a bounce at certain levels I would have never entered those trades long simply because their potential to yield infinite Risk:Reward was diminished by the overwhelming down trend. Why go long when you expect the market to come back to your Entry sooner or later? Still those would have been vaild entries.
To show how absurd the "Mirror Side" statement can be imagine trading short and the market makes low highs and lower lows as you expect it. In a down trend you would enter the market on pullbacks. Would you close your short position when price makes a pullback? Of course not.


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At least that's the way I see it. Given that the market is too big to care whether we're entering or exiting, and that P/L is the difference between 'entry' and 'exit', then - at least mathematically - both must be equally important. Exits are much tougher psychologically than entries - our money is at risk - but our emotions don't alter the math, or the market's behavior.
Mathematically you're right. You're just missing that entries can't wipe you out but exits can. What's more important now?
  • #216
  • Jan 2, 2010 8:39am Jan 2, 2010 8:39am
The REAL reason why 95% of traders fail is the SPREAD.
Let me give you all a small example:

Imagine you have a tp of 30 pips and a sl of 10 pips and the spread is 2 pips (yeah in your dreams!).

Now let's assume that we buy at 1.5000.
But in reality we pay 1.5002. (NOTE: the spread)
Now let's dream that our tp is hit at 1.5032.
Then we buy instantly after out tp is hit at 1.5032.
But in reality we pay now 1.5034. (NOTE: the spread)
etc. etc.

Anyone saw the point? In those two trades we lost 4 pips!! Spread is deadly!

Now another example:
Let's assume our tp is 50 pips and our sl is 20 pips.
If we assume that we don't have any edge (this is actually always the case in Forex) the probability of hitting our tp is sl/(tp+sl)=2/7 and the probability of hitting our sl is tp/(sl+tp)=5/7. But in reality this ain't the case.
In reality the probabilities are (20pips-2pips)/70pips=0.257 (which is smaller than 2/7).

2 pips spread doesn't sound that much but imagine making 1000 trades. That's the same as giving away 2000 pips!

In mathematical terms we can prove this with the help of expectancy, which is calculated as follow:
probability of winning*profit+probability of losing*loss.
Now our tp is 50 pips and sl is 50 pips for simplicity. We trade using 1 lot.
So now our profit would be 500e and loss 500e. Now the expectancy is: 0.5*500-0.5*500=0.
But when we take the spread into account the expectancy is: 0.48*500-0.52*500=-20
  • #217
  • Jan 2, 2010 9:24am Jan 2, 2010 9:24am
Quoting serpo
The REAL reason why 95% of traders fail is the SPREAD.
Let me give you all a small example:

Imagine you have a tp of 30 pips and a sl of 10 pips and the spread is 2 pips (yeah in your dreams!).

Now let's assume that we buy at 1.5000.
But in reality we pay 1.5002. (NOTE: the spread)
Now let's dream that our tp is hit at 1.5032.
Then we buy instantly after out tp is hit at 1.5032.
But in reality we pay now 1.5034. (NOTE: the spread)
etc....
That would be merely related to be true if you overtrade smaller TF and use a fixed TP, which is IMHO one of the big causes of failure per se.

Cheers!
Many share my views with me. But I don't share them with them...
  • #218
  • Jan 2, 2010 9:53am Jan 2, 2010 9:53am
Quoting serpo
In mathematical terms we can prove this with the help of expectancy, which is calculated as follow:
probability of winning*profit+probability of losing*loss.
Now our tp is 50 pips and sl is 50 pips for simplicity. We trade using 1 lot.
So now our profit would be 500e and loss 500e. Now the expectancy is: 0.5*500-0.5*500=0.
But when we take the spread into account the expectancy is: 0.48*500-0.52*500=-20
Clever use of expectancy in your argument. There may be a flaw in your premise:

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Now let's assume that we buy at 1.5000.
But in reality we pay 1.5002.

Either you buy at 1.5000 or 1.5002. If the bid is 1.5000 and the ask is 1.5002 and you buy, you buy at 1.5002. If tp is 50, then you sell at 1.5052 not 1.5050. The gross profit is 50. That means the expectancy is: 0.5*500-0.5*500=0.
  • #219
  • Jan 2, 2010 9:55am Jan 2, 2010 9:55am
Quoting HouseTrader
That would be merely related to be true if you overtrade smaller TF and use a fixed TP, which is IMHO one of the big causes of failure per se.

Cheers!
I second that.
  • #220
  • Jan 2, 2010 10:54am Jan 2, 2010 10:54am
Well... it seems that none of you really get the big picture that spread really kills.

When I get home I will post here a small graph showing how a big difference even a small spread can make over the long run.

But the simple fact in Forex is that the expectancy over the long run is negative, just like in the casino. In casino there are the 0 and 00 and in Forex it's the spread.
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