Another reason why 99% of traders fail

In Forex you have all against you: your broker, the forex dealer, the odds, the undercapitalization and the high leverage, the spread, the commissions, the fees, the swaps, etc.

But imagine a world where there are no forex dealers, no spreads, no commissions, no fees, no swaps... A broker completely free with liquidity providing banks free too.

Imagine that you don't form part of the 99% of losers, but neither of the 1% of winners, you just win exactly the same times that you lose. But because there are no commissions or spreads you think your balance will be always the same, right? YOU'RE WRONG:

Recovering from a lose is more difficult than lose what you have won, if you win 1% and after that you lose a 1% you have less money than at the beginning, if you lose 1% and after you win a 1%, the same.

Here I have attached an Excel template where you can see that matematically: it has 6 sheets: 26_1: 26 trades in total, win +-1% each one, with the same times of wins and loses; 26_2 and 26_3: the same that 26_1 but with the 13 losses and the 13 winnes in a row and in different order. 100: the same of 26_1 but with 100 trades with 1%+- too. Until here you can take a conclussion: when you trade, you are always losing (doesn't matter if you win or lose) a percentage that is equal to: number of trades / 200 when you are using 1% of SL and TP.

But in sheets 100_2% and 100_10% comes the interesting thing, they are exactly the same that the sheet 100 but with 2% and 10% of P/L in each direction (both SL and TP) respectively. Maybe you want to risk a little more to win more, it is a good idea? NO! You will end up losing more money than if you only expect a 1% of wins: you lose a percentage that is equal to: number of trades / 50 when you are using 2% of SL and TP and number of trades / 2,5 when you expect a 10% of TP and risk the same, 10% in your SL.

So... If you have read till here you realize that we have a problem here: if you are a scalper and overtrade with tight SLs and TPs you will lose a lot of money when the number of trades will be high. And if you trade on larger time frames and, in consequence, you have to risk more to win more, you have the same problem even if you trade less times: you always lose.

So my conclussion is... Don't trade if you are not sure that you are going to win, because the more you trade, the more you lose. Risk the less you can in each trade and take little profits. In one sentence: trade little with little profit in each trade or you will end up losing all your money just for opening trades. And I repeat, all of this is assuming no spreads and no commissions.

I have added a "Bonus sheet", where you can see that if you risk a 10% in each trade, even if you win 52 times and lose 48, you will end up losing money, even without spreads!!! So, always remember:

The more you risk, the more you will lose even if you win more times than you lose.

Trad3r, your charts are beautiful, however, I disagree with your findings.

Why trade with 10% of your balance? I was taught that 2% was better money management. This amount allow you the freedom to refine your trading method without going broke. Believe it or not some traders can trade with a goal of making two to three time their risk.

If you have that high a degree of losing trades, take the next year to learn
how to trade with a higher degree of accuracy, using a demo account or get
professional training.

I understand that you are addressing the age old tale of forex that if you just make money on 51% of your trade you will get rich. That's not quite accurate! You need a much higher winning average to get wealthy. For most of us it takes4 to 5 years to get to the required accuracy. I myself took over five years to finally understand how to trade the market for consistent profits.

What I finally learned is that simple is better, pull the trigger, take profit when I see it, if the trade is not working get out, don't aim for 51% accuracy try to get 90% accuracy. Even if I don't get 90%, I still far above the mythical 51%.

Sorry, I didn't look at your XLS, but from your quote above, is this what you're describing? If so, I thought that you might find the post in the link, and the ones that follow it, relevant to your line of thinking.
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[EDIT] I looked at the formulae in your XLS. With fixed frac sizing (risking a fixed % of your equity on each trade), the order of wins and losses is irrelevant, because A x B x C = A x C x B = B x A x C etc. This is explained further in the posts following the one in the link that I gave.

m8, better read it once again his writing. He ain't suggesting any 10% wagering there, I guess.

He simply pointed out that if you risk more money, you'll end up losing even if your winning trade is more than your losing ones.

That's his point, I guess.

Well, CMIIW

Thank you for an interesting post. I disagree with some of what you say and agree with some.

In Forex we do not have all against us. For example, it is a common misconception that brokers are against us. They take commission - true. Their prices reflect market stop hunts, spikes and general shenanigans - true (general shenanigans is a technical term which you may not have heard). They won't fill or close when the market moves fast - true (would you?). People who lose money in Forex often blame the broker initially and it is only natural.

The fact is that brokers only exist because of traders and vice versa. Brokers want us to stay in the game. They don't lose when we gain. Without profitable traders there would not be brokers.

I also take issue with your idea of taking a little profit with each trade. We must take a big profit from each trade. I know it is excruciating to see a trade reverse when it is making a hefty profit. Anyone who trades knows that this is (a) what the market does and to be expected and (b) very frustrating at times. But unless we can guarantee well above 50% winning trades then our reward risk ratio has to be much higher than 1 : 1. In order to achieve this we must be brutal with losing trades and liberal with winners. Otherwise the drawdown equation will beat us every time.

This brings me to the drawdown point. Hanover posted a link which I think describes what you are explaining. Basically drawdown means less capital and therefore less leverage for trading. i.e. deep drawdown is almost impossible to correct safely. (I must hold a guilty hand up here to confess to that blood curdling sweaty palpitating experience of over leveraging to escape from massive drawdown in my earlier trading days. Not recommended.) But without this leverage most small traders would not have a worthwhile chance of trading due to capital restrictions. Imagine trading a 5,000 account without leverage. How quickly could you grow that?

Thank you for all the work you have put into the spreadsheets and they are interesting. I think we get the message i.e. trade carefully. I do trade carefully and nowadays my losses are usually less than 0.2% of my account. Yes you read that correctly. I rarely risk 1% or 2%. Much more relaxing. For example I have a trade running at the moment which was taken off the hourly chart 11 days ago and is still running. This example is not intended to be bragging. It's actually an admission of a lack of skill or knowledge of what the market will do. Because if I didn't let this happen then I'd better make sure I am right with every time I pull the trigger. As it is I can get away with being right less than 50% of the time. Surely a big advantage?

Anyway, trade carefully by looking after your margin is your point and I take it on board completely. I sat here earning a penny an hour when I was learning (I'm still learning) and I felt pretty stupid I can tell you.

99% of all traders fail is just a good excuse for people who are looking to quit. Do you realize how common that figure is thrown about in just about every human endeavour?

99% of people will never become successful actors, 99% of people will never become successful singers, 99% of people will never become successful athletes, 99% of people will never become successful race drivers, 99% of people will never become successful chess players, 99% of people will never become successful doctors, 99% of people will never become successful Marine Snipers, 99% of people will never become a Navy SEAL. 99% of people will never become a Ph.D

See the trend here? Here is another way to look at it, 1% of people are dispersed across the entire spectrum of human accomplishment. One day you're going to have to decide where you want to throw in and become 1% of.

100% of people fail at something, what you succeed at depends on what you don't give up on.

this is a fantastic post.

I bet 99% of those 99% hardly put a serious and dedicated effort at learning to trade.

And that makes 1% of 99% put serious and dedicated effort and failed miserably??

Ah well, (sh)it happens!..

Yes and do you know, that's the scariest thing. My heart goes out to those who try really hard and then fail.

Hmm... but then again, those try really hard and fail, will go successful in near future, I guess.

Why??

- Well, they have sufficient knowledge (note : they worked hard to acquire it!)
- They already have the winner's psychology (note : if they choose to stand up from their recent loss).

Well, that's just my opinion mate...

utjph has answered you, this is only an example to show how the increasing of the risk will kill you, it doesn't matter if you has a 52% of succesful ratio for example.

Thank you for the link, this is exactly what I mean, to recover from a drawdown is harder than to lose what you win. I'm seeing that you have the same discussion 2 years ago with the same conclusions:

OK, let's tabulate this, for different values at risk (assume 50% win rate, 1:1 RR, no spread or swap costs):

At 1% risk, our expectancy is –0.005% per trade.
At 2% risk, our expectancy is –0.02% per trade.
At 3% risk, our expectancy is –0.045% per trade.
At 4% risk, our expectancy is –0.08% per trade.
At 5% risk, our expectancy is –0.125% per trade.
At 10% risk, our expectancy is –0.5% per trade.

This is a quadratic function, i.e. multiply the risk by N, and the negative expectancy increases by a factor of N squared.

Very interesting thread, I'm reading it. I recommend all traders who are reading this thread that read also the other thread.

I'm completely agreed with you in the RRR, in fact I've been doing that in a trading journal till one week ago with a RRR of 1:5, you can see it here http://www.forexfactory.com/showthread.php?t=240218, in 2 weeks the strategy give me a positive return of 113 pips, but now I have more time and I don't want to wait weeks to close trades, so now I'm testing an scalping strategy of 1:1 RRR, why only 1:1? Because I think that if you make a very good entry with a 1:1 RRR you will close the trade in the TP in a high % of times. But if you wait more the market can change, lose what you won and throw away a good entry. But for the moment the stategy is on its testing phase, the other strategy worked but with low profits... And with compound interest maybe scalp with more entries will give me better results, will see.

99% of traders fail because these traders approach the forex market without a concept. This explains how most of them are losers, a fact which is statistically confirmed.

Whoaaa..... such a harsh way to put that in your statement.

Anyway mate, with mentioning that word 'concept' actually you are kinda put yourself in the same shoes as the other. Why?? Because, I can be sure that everyone has a 'concept' of trading in their mind.

(And ultimately, that makes you sound like someone new to trade.... well, forgive me if I'm mistaken)

NB : I'm kinda confused here. Why would we try to understand why people fail in FOREX?? I thought winning is better than losing. Or is it just me??

Concept means idea of class of objects. Here concept means idea of forex trading. Majority of traders fail because they trade without knowing the fundamentals of forex trading, the market movements. They do not develop a winning strategy which takes many years of forex experience.

Yes you are correct. I am new to forex trading.

well, here is my 2 cents to get evry one riled up.
99% fail because they think they know something, or they read somewhere that someone made huge sums of money tradin and they have a foolproof system. greed stes in and they go all in then BOOM!!!, they are broke.

my opinion, there are many ways to make money trading in forex. one thing i do know, there is not a foolproof system. why, cuz the market is not sane. this is rule number one. you can back test any trading method and there will be losers, alot of them. the only way you could ever have a system work is if it looked into the future and told you what was going to happen. all i have heard over the past few months watching the business channels is how this recession is like a previous one in some way shape of form and the markets will do this at this quarter or that quarter. really??? do you really think you know what is going to happen??? are you the great Karnac??? if they can see that, then it is time to take them to vegas and have them predict the roulette wheel or blackjack so i can wim millions and live the good life!!!!!

the point i am trying to make is this. you can make money every day. it may not be alot, but over time, it will add up. i see too many people on here looking for the home run with a huge move and lots of lots. "son, your ego is writing checks your body can't cash". sorry, the line fits. there is a thread on here about making 5 pips a trade on eur/usd, i have not fully read it, but it makes sense to me. if you make 10 trades a day like he does, gets his 5 pips and gets out, waits for the next trade and repeats. he makes 10-20 trades a day. even if you use just one lot, that is 50-100 a day. now i know for some people it is a waste of time, but really think about it. 250 a week, 1000 a month. for some, that is lunch money. for others, that adds to the family budget. over time, this money will add up, even if you just use it to pay bills. that means any other money you earn can be used to pay for other things instead of go further into debt. 10 years down the road, if you just put it all away, you have 120000 laying around. does that make a difference???

i know what i am saying is simplistic, but i have fallen into the trap everyone else has i am sure either fallen inot or are close. think BIG PICTURE. make short quick trades, bank the positive pips. don't cry over missed pips, it will only make you broke. follow your system, don't try and change it every week, as i said, the market is insane. just because it does something on week, does not mean it will do it again the next the same way, it never does. if you are not comfortable, get out or don't trade. how many times have i seen people pop off in here about a sl getting hit and it moves 300 pips in the direction you were going. why didn't they get back in and at least get back their loss?? i have made mistakes trading, all because i was unwilling to take the little moves, i wanted all the big moves. i dream of a life that rock stars would be jealous of. i now realize that i am the jealous one. i have asked myself lately if i would really enjoy that life style. part of it would be awesome, but the other half would really suck, i think.

for me, i think a comfortable life would be fine. build my wealth one day at a time, 1 trade at a time. don't worry about what other people may say about how you go about it. sorry about the sermon, but i really don't think it matters how you get there, as long as you get there, but don't be a criminal about it.

Actually it is wrong to say that 99% traders lose in forex. The correct number would be 75% or 80% traders lose in forex trading.

an addendum to my earlier comments:

traders fail not because of lack of trying or understanding, but from the fact that we don't trade within ourselves. by this i mean we trade to make money. some people have a system when they get here, or maybe they are trying to make their system better, so they come here to find something more to help them. to be honest, i see lots of winning systems here, what i don't see are consistant results. now i ahve read here lots, is that the system is rigged by the big boys, they let us on the dodgeball court, but then they cream us all at once. there are not enough little traders like us to give them the billions they need to make a year for them to be profitable, so i don't see that as the excuse that it is tough for us small fry to make some money. what i see as the issue is that we, and i mean all here try and make trades when we shouldn't. if you have a system, follow it to the letter. if it is not exactly like the rules say, don't trade. too many time we force trades cuz we think this one will be a biggie, it ends up being a biggie the other way and you lose. now you are playing catch up forever more. i have done this myself, saying 2 out of 3 ain't bad for a trade. well, sometimes it is for a few pips, but you hang on thinking that it will continue to run and it doesn't.

all in all, how to be that one percent of the successful traders is to find a system you understand, don't complicate it with every signal known to man, keep it simple, and make pips. that may mean a couple of entries on every move, as you jump in and out or however you set your entries and exits. do not predict the pip count before you enter, just take what it offers. you can try and predict 50 pips, but what if it only goes 48 or 49?? hang on and get your stop loss triggered with a 20-30 pip loss??? i bet people on here would be at 90-95% profitable trades if they took what they were given instead of trying to predict a certain number of pips on every move they entered. seriously, take a look at all of your losers and look to see if the market ran against you right away, or you were actually up pips before it turned. if you had jumped out instead of holding, how many of those loses would have been wins?? this is something i have been trying to come to grips with, and i think maybe now i have found the wisdom to follow this. maybe it will work, maybe not, but i will find out. like i said, just my 2 pips.

The more important question is how many are significant winners? Profitable doesn't mean one can make a good living.

That's rather philosophical ain't it mate??

Well, my point is you can't know all bout the market. So, what's left to do?? Just do something to yourself so that you can adjust to the movement. Do calculate to make sufficient anticipation.

NB : I think you may read the 'trading in the zone' to understand bout that. Erm.. sorry, forgot the author, Mark something if I'm not mistaken.

Anyway, GL HF in your journey mate. Let's just meet at the top.

I disagree with you on this. You listed talents/professions that are very difficult (if not impossible) for most to achieve just to fit your argument.