What Percentage of New Traders Fail? (Part 6)

Today I conclude with excerpts from a 2013 Forex website forum discussion. The initial post, which tries to rebuke traditional wisdom, is Post #1 here. Forum content is unscientific and open to scrutiny. Do your own due diligence and buyer beware.

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• Post #54, Set:

     > Trading is just like learning any other skill. The catch
     > is that people often learn trading with minimal supervision
     > and guidance. This is what discourages most people.
     >
     > But we can change this around. As trader gets more involved
     > and contribute to a community, he will have more
     > encouragement to work through the learning curve. Recently,
     > I have decided to contribute daily to this forum and I have
     > noticed a significant change in my attitude towards trading.
     >
     > Trading is a business and Henry Ford once said, “a business
     > that makes nothing but money is a poor business.”
     >
     > I really like this forum because of all the great mentors
     > available here and I aim to become one myself.

I like the positivity here as opposed to the oft-seen flaming, ego, and negativity I see in trading-related forums. I definitely think we must be selective in what we accept, but I think a general belief that people are good can help the foundation.

• Post #56, Big

     > Yes, it is skewed and does not relate to the statement
     > that 99%, 95% or [insert here any anecdotal % that you
     > extract from your nether orifice here, because no one
     > that makes the statement has the figures anyway]…
     >
     > Let’s assume that we start from day 1 and we’ll use
     > 95% because, well, why not!
     >
     > Year 1: 95% newbies fail 5% succeed
     > Year 2: 95% fail 5% succeed, + the 5% that succeeded
     > last year are still hanging around because they wouldn’t
     > quit when they are profitable.
     > Year 3: 95% of newbies fail and the successful 5% of
     > newbies join the profitable dudes from year 1 and 2.
     >
     > Get it? Many of the unsuccessful traders will quit, but
     > the successful traders will stay on so the percentage of
     > profitable traders grows each year… it is cumulative!
     >
     > The “profitable” percentage in the brokers’ reports show
     > the experienced traders that have been here for years, in
     > addition to the small percentage of newbies that have been
     > profitable. It will always grow because you don’t quit if
     > you are profitable.
     >
     > Most unprofitable traders, if they do not become
     > profitable, will eventually quit so that number is more
     > likely to level out.
     >
     > I’d like to see the yearly figures of newbies after one
     > year, two years, three years, etc… because it may take
     > several years to become successful. That, and only that,
     > would test the validity of the anecdote that 95 – 99% fail.

This is a really good example of how such broker numbers can be skewed to the upside. I also remember back to Post #33 where successful traders having multiple accounts was discussed.

• Post #62, Unk

     > The percentage of traders that fail are much higher than
     > the statistics show. Of all the traders that show a positive
     > equity curve most still fail as the few pennies they
     > make won’t even beat a McD wage. If you make some rules
     > on what is actually “profitable” e.g. making a living
     > off it / competitive salary (with benefits, etc.) than the
     > field of successful traders gets much slimmer…

The Brazilian day-trading study agrees with this.

• Post #64, Pip

     > The percentages are so high because it’s calculated per
     > quarter. It’s not because “winning traders” stack up each
     > year: some winning traders quit and many losing traders
     > don’t. The chance for having a significant amount of
     > winners in a quarter is very large. The fact that these
     > numbers are so skewed toward losing is proof that of few
     > profitable traders. There’s a very big chance for any loser
     > to be profitable over one month or year. So Guy 1 loses
     > $2K in three months and Guy 2 wins $1K. Next quarter
     > Guy 1 wins $1K in three months and Guy 2 loses $2K.
     > Both are losers, yet the statistics say there’s one loser
     > and one winner in each quarter.

This seems like another interesting example to illustrate how success statistics may be biased to the upside. Losing traders will have to quit, though, if they lose too much or go bust altogether.

Brokerages certainly have an underlying motive to portray success. If the general public believes many retail traders succeed, then newbies will be more likely to try themselves. The more people trade, the more money brokerages make.

This thread has provided us with lots of good fodder for critical thinking and evaluation.