Do 95% of retail traders fail?
This is an often asked question - do 95% of traders fail? It often gets a long argument from people. On one side, 95% sounds like a lot, and of course, if 95% fail, why bother with forex? On one hand, teachers and brokers do not really like to talk about this figure = its simply not in their interest to say that they are selling you a way to make money that will lose you money (or that you will see as a failure) in 95% of cases.
We can compare the 95% to start up figures for businesses - latest US figures for 5 year start ups is 50% are still running after 5 years. We can’t really compare the profitability to existence because profitability is not assessed - instead we have to look if the business is still running. Of course, there are numerous reasons for start ups not continuing - the business owner may move location (marriage, children etc), they may find a lucrative job that makes more than their business, they may go bust, or they may get bought out/leased out to another company (as happens to a lot of restaurants). In all likelihood, logically the ‘profitability’ figure should be higher than 50% (because people quitting the business because of moving house/kids, or being bought out is not a failure).
In forex this is simpler. A forex account that is in profit is in profit no matter whether it is running or the user has abandoned it to change jobs/look after kids etc. Therefore our job is ‘easier’ if we want to see how many traders ‘fail.’
We do need to assess the nature of ‘failure.’ Does failure mean ‘blowing the account,’ or does it also include ‘having a large drawdown’ or does it include ‘not becoming a viable means to spend the person’s time?’ The best answer I think is the latter. A lot of people trade forex hoping to make a career or make money. If they end up failing to make it as a career, or failing to make money then this would count as failure. If they are attempting to become money managers and they have large drawdowns, yet still make some money, and fail to attract clients, then this would count as failure. After all, if you classified a 'money management firm as a business start up, and that business failed to attract customers - then you would consider it a failure.
So the ‘failure’ aspect of trading is very wide. If a US based trader only makes $500 a month trading full time, then this would widely be regarded as a failure, since it is lower than the minimum wage. That trader would be better off working as a cleaner, working in McDonalds since they would make more money, and have a more reliable job. However, if a retired 68 year old man makes $500 trading part time, then they could be considered a success, since they would not get employment elsewhere, and it could be considered an effective use of his time. Likewise, a trader in Vietnam making $500 a month would eclipse a lot of professional salaries and would be considered a ‘success.’ So we need to consider that ‘failure’ is what the individual circumstances dictate as ‘failure’ and what an outside observer considers as failure. For instance, a 25 year old US based trader who makes $10 a day may consider themselves a huge success because they have a 97% winrate and 50 pips a day but any rational person would clearly see that $10 a day for full time work is anything but success.
In fact, most full time retail traders look at trading as a lucrative career. For US, UK, Canadian or Australian citizens (and other First World countries), the average full time salary is between $40-60 000. To get to this salary level you do not need to be smart, well qualified or particularly driven. As long as you turn up on work on time, are polite, and do the work required then you will get to this salary position. To make this “average” salary a trader would have to make $3800-5000 per month.
Most people go into forex to make a lot of money. This would equate to $100 000+ per year for a ‘higher bracket’ of earning. This salary is achievable in most Western Countries by working a bit of overtime, having decent qualifications, or being pals with your boss. Most UK electricians/plumbers/tradies who are competent will earn this salary. This would require a trader to make $8000 a month.
Of course, most traders want to make ‘megabucks’ trading. This would be $200 000+ per year - the same salary as a doctor, lawyer, successful salesman or successful business owner. This would require traders to make $15 000+ per month.
Looking at most retail traders - most traders will not even make the first bracket of $5000 per month. These ‘career’ retail traders would widely be considered a failure by themselves unless they are constantly ‘looking to the future’ for their profits. Certainly full time First World traders who are making $10-20 per day are very far off success. If we take the example of the business owner - what if you came across a full time business owner who was making $10 a day? Would you consider their enterprise a success or a failure - even if they consistently claimed that they would be ‘scaling up?’
Next we look at the quantitative approach for seeing whether a trader is a success or a failure. I did some research on the babypips forum recently and I will cut and paste my findings below, but basically the sample of 40 traders I found that only 4 were profitable (10%). The profitable figures are likely to be lower because only the ‘cream’ of retail traders publish their accounts live so the 95% failure is likely.
I found 40 myfxbooks that were traded on a live account in 2012/13, with a real broker, fully verified that had results for > 3 months.
I ignored accounts that were demo, traded on an unverified account, those who used an ‘unknown broker,’ or those with a history shorter than 3 months. I hope the reasons why I did that were obvious. I would have liked to restrict the accounts to those >$1000 in size, but unfortunately most people hide their account size and the sample size would have been too small to be meaningful.
Out of the 40, 35 accounts were deleted or at a loss
1 out of 40 was effectively breakeven
4 out of the 40 were profitable. Of these 4 accounts, 3 gained less than 10% ROI with a drawdown greater than 40%
The best account had an ROI of +42% with an drawdown greater than 50%. I have my research on a little .doc file but I won’t attach it because I don’t think that people would appreciate having attention drawn to them - you can after all search for them yourself.
You can debate what the deleted accounts represented, whether they were people who made millions and wanted to delete their accounts, or if they considered their accounts unsuccessful because of loss/drawdown etc and they deleted them. I believe the latter.
This would give babypips members who published their myfxbooks just under 90% failure rate.
Again you can debate whether people who publish their myfxbooks are ‘better’ traders than those who don’t. I am inclined to believe that the better traders publish myfxbooks, whereas the worse ones do not. Effectively this would mean that the failure rate for babypips traders is more than the 85%+ in the small sample that I took. I did not include the accounts that I knew of that were traded which had not been linked on babypips (all of those I know of are negative equity or effectively breakeven) which would have swung the failure rate even higher, but I thought it not fair to include those who did not publically publish their results.
So why is this different from the figures given by brokers? (FXCM figures)
Quarterly Report % Profitable % Unprofitable Total Non-Discretionary Accounts
Sep – Dec, 2009 26% 74% 22,371
Jan – March, 2010 25% 75% 19,049
April – June, 2010 23% 77% 17,771
July – Sep, 2010 23% 77% 15,023
I will frequently read posts that claim that it is 25% that is profitable therefore 75% that is a failure stating the evidence above eg: in the thread on babypips: 301 Moved Permanently
However, this arguments do not properly address the statement that 95% of traders fail to make a profit. The statement that the evidence above is addressing is that 75% fail to make a profit OVER 3 MONTHS. The original statement addresses a working life timeframe -“95% of traders fail to make a profit over the time they are trading forex”.
People who state the evidence above for some reason are not considering the difference between incidence and prevalence and are not actually ‘on the same page’ as the statement. Lets take a simple example.
“99% of people get colds” is a reasonable statement to make. What if someone produced evidence that over Jan 2011- April 2011 only 10% of people got colds, so the 99% of people getting colds is a myth. You would immediately assume that person just did not know what they were talking about, and the same applies for forex accounts. 95% of traders failing is OVER THE COURSE OF THEIR TRADING LIFE. NOT OVER A 3 MONTH PERIOD. Claiming that only 25% of traders lose is like claiming only 10% of people get colds - of course this is utter nonsense.
Myfxbook do provide stats but they are a bit flawed how they are set up - I shall enquire and try and get a better answer - I think myfxbook has 30 000 live systems so it should be an adequate sample to get accurate data on success/failure.