95% of retail Forex traders lose money – Is this Fact, or Fiction?

There is a well known statistic being passed around the Forex community and there is a good chance you’ve come across it, possibly numerous times. Basically, it says that ‘95% of Forex traders lose money’.

For traders who are chasing their dream of becoming a full time Forex trader, or at least trying to achieve even part time trading success; this statement can be a bit of a demotivator.

If 95% are blowing up their accounts, the statistics imply you also will be become one of the losses.

It’s not a very comforting thought is it!  In a world of failing traders, what steps can you take to become the minority who survives and make consistent returns from Forex trading?

In this article I want to do some investigating. We are going to try verify the claim ‘95% of Forex traders lose money’. We’re going to go over some supporting evidence, and attempt to conclude if this just a phrase used for scare tactics, or if it is actually based on fact.

Special thanks to War Room member ‘kin’ (marketstudent) for helping me compile the information contained in today’s article.

Let’s go through some of the factual evidence we’ve dug up that supports the statement…

The Evidence that Forex traders lose money

China bans Forex margin trading

According to a Reuters article in 2008, the China Banking Regulatory Commission banned banks from offering Forex margin trading to their clients.

“Eighty to 90 percent of players in Forex traders lose money, through banks providing the service were generally making a profit from it, the banking regulator said.”

This quote is useful but far from conclusive.

The profitability of day traders

“The profitability of day traders” was an article written by Douglas J. Jordan and J. David Diltz, published in the Financial Analysts Journal (Vol. 59, No. 6, Nov-Dec 2003).

If you want to read the full article you will have to pay for it, but the abstract reads as follows:

“We used two distinct methodologies to examine the profitability of a sample of U.S. day traders. The results show that about twice as many day traders lose money as make money. Approximately 20 percent of sample day traders were more than marginally profitable. We found evidence that day-trader profitability is related to movements in the Nasdaq Composite Index.”

All this really does is support our own views on day trading. It’s harder and riskier than the longer term swing trading. But, this still isn’t enough to nail down the statistic as fact, so let’s move on…

The Cross-Section of Speculator Skill: Evidence from Taiwan

“The Cross-Section of Speculator Skill: Evidence from Taiwan” is a research paper by Barber, Lee, Liu and Odean published on 14th February 2011 on the Social Science Research Network.

Using data from the Taiwanese Stock Exchange, the performance of day traders over the 15 year period 1992-2006 was evaluated.

The following quote on page 13 is particularly relevant:

“In the average year, 360,000 individuals engage in day trading. While about 13% earn profits net of fees in the typical year, the results of our analysis suggest that less than 2% of day traders (1,000 out of 360,000) are able to outperform consistently.”

This is a very alarming statistic, only 2% of these traders were consistently profitable. Remember though, this study only had day traders under the microscope, and didn’t look any other style of traders. Let’s look at some evidence from the brokers themselves, which factors in a broader range of trading styles.

U.S. Commodity Futures Trading Commission Regulations

The U.S. Commodity Futures Trading Commission (CFTC) introduced new regulation in October 2010 forcing US brokers to lower the amount of leverage that can be offered to customers (maximum limits are 50:1 on major currency pairs and 20:1 on other currency pairs).

US forex brokers are now also forced to disclose the percentage of active forex accounts that are actually profitable.

Michael Greenberg of Forex Magnates has compiled the data for the first quarter of 2011.

The Magnates chart tells us that during the first quarter of 2011, the US brokers listed here reported that an average of ~25% of their ‘active’ accounts where in profit. This is a dramatic increase in percentages that we’ve seen in the other reports we previous covered. This data however is still not good enough to start base conclusions that 95% of Forex traders lose money on for the following reasons.

• The chart only shows a handful of US brokers. Aside from Africa, the US actually has the smallest of the retail trading population
• The data collected is only really from a 4 month period, which is hardly anything
• The data doesn’t specify if withdrawals and deposits are taken into consideration
• The data doesn’t show if those accounts are experiencing growth over time, or are just simply ‘up’ from their previous 4 month figure
• To reinforce on the last point, are these profitable accounts over their ‘high watermark line’, or have they suffered a massive loss, but recovered a small percentage within the 4 month period therefore considered ‘in profit’

The new CFTC disclosure requirements are certainly a step in the right direction towards greater transparency in the Forex industry. However, it is important to treat the percentage figures of winning and losing accounts with a degree of skepticism for the following reasons we just stated.

All of the brokers will be eager to present themselves in the best possible light – so it would not be too surprising if the figures were subject to some manipulation. If a broker can claim to have a higher percentage of winning accounts than their rivals, this may attract new customers to open up accounts with them.

It is important to note that the data only includes “active” accounts (and the definition of “active” maybe interpreted differently by different brokers). We have no idea how many new accounts blew up in their first few months of Forex trading and subsequently became “inactive” (and thus were omitted).

Oanda in particular have been guilty of some creative accounting – their data from Q3 2010 showed that a spectacular 51% of accounts were profitable, 18% more than the nearest competitor. However it turned out that included in their definition of “active” accounts were accounts that contained no trading activity but had simply accrued interest on the account balance!

The CFTC quickly put their foot down and 6 months later we see that the percentage of winning accounts at Oanda has dropped to 38.1%.

As disclosure requirements tighten in the future, these winning percentages are expected to fall even further.

What conclusions we can make from the data

Even with all the digging we’ve done, and all the evidence we have sifted through, we simply still don’t have enough data to conclusive confirm that ‘95% of Forex traders lose money ’.

One thing is for sure, it doesn’t look good for day traders. The evidence is basically conclusive that only ~2% of day traders can actually consistently turn a profit. This is no surprise to us though, we know day trading is a really stressful and tiring way to approach the market.

Day traders are required to sit in front of the computer for hours on end, staring at price charts while waiting for an intraday trade opportunity to present itself. Most of the day trades are placed with the intention of quickly being in and out of the market over a span of a few hours. With so many retail Forex traders engaging in scalping or day trading strategies, I am not surprised that most Forex traders lose money .

This combination of high frequency trading, and staring at charts all day is very psychologically taxing. Most day traders are failing because their patience wears too thin. They begin to do silly things in the market out of boredom, fatigue or frustration. Swing traders like us, use the core movements from the higher time frames to take easy, longer term trades. Swing traders ride out the dominant market direction it much stress-less fashion.

By doing things like trading with the daily time frame, we don’t have to spend much time in front of the charts. This gives us the freedom to set our trades, and not have the burden of constantly monitoring them for hours. The idea is to be less involved with the market as a whole.

Even though we don’t have anything 100% conclusive to support ‘95% Forex traders lose money’ it’s pretty safe to conclude that a ‘high percentage of Forex traders lose money’.

We have a few variations of this statement that we believe to be justified…

“100% of traders blow their first trading account”

“95% of Forex traders lose money during their first year of trading”

“High frequency traders find it harder to make money consistently than long term traders”

How can you avoid becoming a statistic?

All of the anecdotal and hard evidence examined in this article strongly suggests that Forex traders lose money and the vast majority of traders are not profitable. It is not really possible to arrive at an exact percentage, but we can see that the most conservative estimate suggests that 87% of traders lose. So the soft quoted 95% statistic may be a little high, but it is fair to say that trading is NOT easy.

So how can we as traders avoid being one of the losing statistics. What are the small minority of successful traders doing that everybody else isn’t?

By working with many traders in our Price Action War Room, we’re always on the front line witnessing how traders are ‘shooting themselves in the foot’. Traders who struggle to move forward, and hindering any positive progress with their trading goals all seem to share some similarities.

• The trader doesn’t have realistic expectations about the market
• The trader is over complicating their analysis, trying to make sense of too many variables or looking ‘too deep’ into things
• The trader is in a bad financial situation and trading with real money that is needed for bills, mortgage etc.
• The trader is not using positive geared money management to ensure winning trades outperform losers
• The trader is trading on low time frames, chasing price and market noise instead of using more reliable data from the higher time frames
• The trader is spending way too much time in front of the charts and over trading
• The trader has no trading plan and therefore no consistency
• The trader opens positions during news releases hoping to catch big moves
• The trader doesn’t know how to take a loss
• The trader is impatient and doesn’t wait for high probability trade setups

When you read through that list, how many points are you guilty of? I would bet at least a few. Don’t worry, you’re not the only one. These are everyday issues which traders struggle with and really do hinder their progress of becoming a profitable trader.

Most of the problems are generally a result of psychological weakness. Traders are ‘giving in’ to their inner demons. Unfortunately most traders never build on the character and psychological traits needed to fight these inner temptations. You really need step up, and work on personal improvement to build what it takes to be a good trader.

It’s like a smoker, drug user, or an alcoholic working to overcome their addictions. Deep down they know it’s destroying their health and lives. If they’re not determined and focused enough, it’s easy to fall back into bad habits and start a vicious cycle all over again.

The market will rip you apart, psychologically, in ways you never thought possible. The financial sector is a cruel world which can easily reduce a grown man to tears. It’s important that you understand what your weaknesses are, and face them head on. You’re going to have ups and downs in your trading journey, but just remember …

“What doesn’t kill you will make you stronger”

Do yourself a favor and go back through your history and study your losing trades. Get a pen and paper and make a list of what you think you did wrong when executing each of those losing trades.

I bet you will see a common problem reoccurring on that list. Have that list in front of you when you go to take your next trade. Use this list as a nice reminder of last few times you’ve ‘traded against your better judgement’. Hopefully that it will deter you from making the same mistake again.

Start to tackle your trading weaknesses and self improving to make yourself into a better trader. Give yourself a higher chance of not becoming a fatal statistic. Most Forex traders lose money, but that doesn’t mean you have to. If you’re struggling to find a trading system that doesn’t require you to sit in front of the Forex charts all day.

You maybe be interested in our end of day price action strategies. Stop by the war room information page and check out our price action course details.

Best of luck to you on your trading journey.