Most have probably heard it:
“At least 80% of all traders lose money.”
It’s the sobering reality and I fancy this has to top the list of many as to why doom might seem inevitable in this game.
You can be satisfied that you’ve put the work in, you can feel sure of your methodology in the markets and you can believe that you possess the ability and nerve to be a winner, but unless you’re either an accomplished trading veteran or you’re just foolishly arrogant, it’s only human nature that this statistic must get to just about anyone with a little sense. Ultimately the market doesn’t know what you look like and doesn’t care who you are, so if it were to pick 20 winners (and 20 is generous) out of 100 at random, it’s likely you’d find yourself amongst the 80 throwing money away. I can only speak for myself but, when you have a terrible run in the markets despite being profitable long-term, this 80% figure can still nibble away in you somewhere and, if you add this to a lack of patience, there is an abundance of potential for disaster.
The key to overcoming the fear of the losing statistic is to understand it.
Fortunately, this statistic is loaded with a back-story and, once you get the right perspective, you can try to make it work for you instead of letting mentally ruin you.
Why do at least 80% of all traders lose money?
1) Ignorance
Ignorant speculators aren’t necessarily stupid, they just either haven’t survived making the mistakes to learn from or just aren’t in it with a clear goal of winning over the long-term and, therefore, likely account for a significant amount of the 80% figure. I will say that the first ever trade I opened, a EURUSD spread bet just over 5 years ago now, I opened having read an unknown punter’s forecast on a blog before looking at the chart and thinking “yep, that looks about right”. I also opened a EURJPY trade later that day (in the opposite direction) and ended up £100 in profit on a £350 account. It seemed so easy, chomping on my cheese sandwich whilst enthusiastically watching the candlesticks go up and down in my favour (at the same time saying “go up” and “go down” to the charts, of course, like it was making a difference). There was no system, no backtesting, no risk management and no concept of entries or exits, yet I was still able to happily calculate at the time that, based on a near 30% return during the day, compounding would allow me to become a trading millionaire before I went for my next haircut. Needless to say, I proceeded to blow an account within the year. Fortunately it was only a small account and it’s the only account I’ve ever blown (to date) but, despite the combination of feelings of embarrassed bewilderment and humbled humour now when I look back to the evening of that first trading day, I’m grateful I learned something and I’m still in the game. Having worked on a trading floor at a spread betting brokerage and having witnessed some absolute horror shows, whether it be someone phoning in to ask what a stop-loss is having already opened a £20 spread bet or whether it be someone rifling through their life savings within the space of three months, I know many trading novices swiftly move on after becoming victim to the “six month churn”. If you manage to stick it out past this stage, however, all of a sudden you find the percentages suddenly start to move considerably more in your favour.
2) Desperation
Say you’ve been around for a while and have an understanding of how it works, you realise you have to put some effort in and that there are five very simple steps to trading success (pattern spotting, full backtesting, risk planning, execution, patience), yet for one reason or another you deviate from the game plan. More often than not, I personally believe this is down to a lack of patience. Even if you’ve done your backtesting properly and have acquired results from years of data rather than months, the reality of what can become an emotional rollercoaster of a trading rut can lead to some very poor decisions. One thousand trades of manual backtesting that ultimately end up in an overall profit may only take up a few hours of your time, however just one hundred trades in real time over a prolonged period that bleed your account can easily prompt you to pick up your tiny violin and go sit on the floor in the corner. Unfortunately many people turn to the markets for the quick buck without respecting the game and, like banks (after the credit-crunch at least), the markets have a habit of paying out to those who don’t really need the money. Whatever it is in life, I’ve learned from bitter experience that patience generally beats desperation every time.
3) Undercapitalisation
It usually takes money to make money. If you haven’t really got enough to start off with then this might become an issue. I reject the belief of many that all trading systems fail in the end. The historical data is there in any chart to prove that good systems stand the test of time. In my eyes, the market is a reflection of the sum of all behaviour and, although smart individuals make well informed decisions, the pack will always flock together in the same format, over and over again. Good systems are built on good rationale and a good system should only fail if it can’t withstand a brutal drawdown, straight out of the starting gate. Of course, you might argue that if you’re only risking 1% per trade then you should never blow up, but brokers impose minimum trade sizes, and if it comes to the point that you’re stuck on a minimum stake on a micro account for what seems like forever then perhaps you need to look at what it is you’re getting out of it. It is rotten luck to be beaten by undercapitalisation due to bad timing but, at the end of the day, the markets will always be there and it’s never too late to come back stronger and to turn it all around.
4) Fortitude
Admittedly, I wouldn’t usually use the word “fortitude”, but having just seen an advert for its televised namesake, it seemed fitting to use it here.
If you’ve managed to persevere through your ignorant mistakes as a novice, you’ve managed to keep yourself desperately patient once you’ve learned how to trade, you have enough money in your trading pot to theoretically combat any drawdown with a good trading system (regardless of market conditions and risk management structure), then surely you must now be home and dry?
Sadly, it doesn’t always work this way.
To keep it clean, “things happen” that can cripple your fortitude and swallow you up in the remainder of the 80% (to 95%) losing statistic. Just last month we had the Swiss National Bank remove their 1.20 EURCHF 3-year long trading floor, a few weeks after voicing their commitment to keeping it, prompting an immediate move of the currency pair down to 0.80. This left many traders wiped out as some brokers were slipping stops up to 4,000 points even if you had a stop above the floor! You might argue that it’s foolish to trade a currency pair with a floor, it’s foolish to trade without guaranteed stops or it’s generally foolish to trust anyone except yourself. I have empathy, however, for anyone who was burned on the back of an ultimately very selfish decision without warning, which consequently led to some sour steps back.
5) Self-worth
Last but not least (and indeed most), if you genuinely believe that you do not deserve to make money as a trader then you are just not going to make money as a trader over the long term. You may be trapped in the moral throws of generating legitimate income from what society can deem an illegitimate manner, you might be burdened by self-entitlement issues (warranted or otherwise) as a result of bad experiences from your past or you could just be some sort of self-destructive masochist. Whatever the reason, it doesn’t matter if you’re acknowledged as a trading oracle, you just aren’t going to be successful in the live markets if you don’t think you’re worth it.
If you’re concerned about whether you deserve to make money trading then it’s important to focus on why it is that you’re in it. Before anything else, I’d say that this attitude actually holds strength rather than weakness as self-doubt shows self-awareness and the likelihood that you’d be hesitant to make rash decisions in the markets. If you’re in it to get rich and buy fast cars, that’s fine and good luck to you. If you’re in it for the challenge and a financial back-up plan, however, then you could look at what you can do with the pay-off. You might want to donate a percentage of the proceeds to charity (that can be offset by the tax benefits of the undertaking) or you might just want to provide a better life for your family (which I don’t think anyone can argue with), as long as you put the work in and you are in it for good reason then there shouldn’t be any insurmountable mental obstacle.
The real question is “Is trading for you?”
We all have a go at many things in our lifetime. I’m fairly sure you’ll be able to think of something right at this moment that you’ve been in the top 20% of at some point in your time.
This analogy might not suit everyone but personally I had a misspent youth on the golf course. Despite a particularly mixed bag of form since I’ve had to restrict my batting to the weekends for the most part in order to try to make a living, I have managed to maintain a single figure handicap since adolescence and, therefore, stay in that top 20% (according to http://www.masterscoreboard.co.uk/SiteStats.php, which hosts my home club’s results).
Although I believe you must be fortuitous to land the natural talent of a Henrik Stenson, I also believe that just about anyone can become a single figure handicapper given enough practice and the right attitude. The challenge is exactly the same in the trading game (contrary to popular opinion, you’ll notice I repeatedly refer to trading as a game rather than a business, which requires a separate piece altogether). The trading aim is to maintain your form so that you stay in that top 20% until you’re either too long in the tooth or it’s just the right time to move on from it. If golf statistics don’t work for you, try to find some statistics of anything you’re reasonably versed in so you’re able to draw reassurance and reinforce some self-confidence.
One obvious thing to note, however, is that golf and trading are very different beasts. Repeated disaster on the golf course can be rectified by a beverage of your choice in the clubhouse. Repeated disaster in the markets can often signal a gambling problem. I’m not an advocate of giving up on anything or anyone but, there is a difference between giving up and moving on and, you must move on from environments in life at the time when they only become a poison to you. This is easier said than done, of course, but the beauty about removing yourself from the live markets is that you aren’t upsetting anyone and that demo accounts will always be there to take you back.
At the end of the day, I see the way to approach the financial markets is that you have two options:
a) Take the necessary steps to give you the best part of 100% chance to be in the 5% to 20% of winning traders.
b) Give yourself 100% chance of breaking even by staying out of the markets if, quite clearly, they aren’t for you.
It’s pure speculation on my part, but I reckon the best part 100% who are reading this are perfectly capable of option ‘a)’.
