statistics of losing traders

[DrEvil]

Everyone has heard that 90% of retail traders are losers. That's an interesting statistic but what I would like to know is how does that number change if you consider number of years trading.

Could it be that a large chunk of that 90% is made up from novice traders that blow up within 6 months never to trade again.

It's guess work but I would think that 70% of retail traders that have been trading for 2 years are losers ... possibly less than 50% of retail traders who have been in the game for more than 6 years are losers.

Can anyone answer with more authority? I think this is worth discussing.

 

[doli]

Just googled for "90% traders losers" and it seems to turn up a lot of vendor links. Maybe a scare tactic meant to appeal to those afraid of losing?

 

[clacy]

I would guess that it takes into account all of the people that see the websites and think that all they have to do is purchase an ebook or a website service and they will be millionaires within a couple of years.

Then after a 2-5 losing trades, with a couple winners in there, they decide that it is impossible to trade for a living and quit.

It's just like anything else. To be in the top 20%, you have to have some skills and work your ass off. Most people can't or won't do that and the probably fail.

 

[efficiency]

There's a distinction between trading and trading for a living. The latter, like any business, whether it's a hot dog stand or a welding shop requires capital (as welll as a certain amount of effort and the ideal attribute of consistency).

Is "your" 90% expectancy or capital erosion? It only takes a 55% expectancy to be comfortable provided the win/loss ratio exceeds 2 to 1. In other words, the time-tested adage of "riding profits and cutting losses".

Assuming it's erosion, that stems from over-leveraging (position size) and improper exits (both too soon on the profit side and too late by a passive approach to risk management). a/k/a wishful thinking. Denial. Ego.

To paraphrase Seykota, "there are old traders, there are bold traders, there are few that are both". To paraphrase Jones, "only losers average losers". That gets us back to wishful thinking.

Despite sessions. Wall Street essentially makes 24/7 effort to SELL paper. Novices are continually needed to feed the machine. Reading on this site, I'd venture to say the ferris wheel is always turning. Novices have a fascination with entry, desire for complexity rather than the simple, no plan for exit (higher or lower), switch methodolgies, disregard position size, and impressionable toward irrelevant details, particularly "news"

Internal news is BY DESIGN to both timing of the release and content. Already acted upon for the probable response, like a fiddle. Tweedle dee.

IF I don't have losses, I'm not maiking enough trades. Take pride in containing them small. Reflex action like scratching my butt. When they're not small, most likely due to unforseen material gaps, entered into a losses journal as to the who what where when why and how. Ideally NOT to be repeated again.

Pareto princiiple. 90/10 on CBOE, more like 80/20 on swing trading. Hard to tell on intra-day scalping.

 

[infolode]

Quote from efficiency:

There's a distinction between trading and trading for a living. The latter, like any business, whether it's a hot dog stand or a welding shop requires capital (as welll as a certain amount of effort and the ideal attribute of consistency).

Is "your" 90% expectancy or capital erosion? It only takes a 55% expectancy to be comfortable provided the win/loss ratio exceeds 2 to 1. In other words, the time-tested adage of "riding profits and cutting losses".

Assuming it's erosion, that stems from over-leveraging (position size) and improper exits (both too soon on the profit side and too late by a passive approach to risk management). a/k/a wishful thinking. Denial. Ego.

To paraphrase Seykota, "there are old traders, there are bold traders, there are few that are both". To paraphrase Jones, "only losers average losers". That gets us back to wishful thinking.

Despite sessions. Wall Street essentially makes 24/7 effort to SELL paper. Novices are continually needed to feed the machine. Reading on this site, I'd venture to say the ferris wheel is always turning. Novices have a fascination with entry, desire for complexity rather than the simple, no plan for exit (higher or lower), switch methodolgies, disregard position size, and impressionable toward irrelevant details, particularly "news"

Internal news is BY DESIGN to both timing of the release and content. Already acted upon for the probable response, like a fiddle. Tweedle dee.

IF I don't have losses, I'm not maiking enough trades. Take pride in containing them small. Reflex action like scratching my butt. When they're not small, most likely due to unforseen material gaps, entered into a losses journal as to the who what where when why and how. Ideally NOT to be repeated again.

Pareto princiiple. 90/10 on CBOE, more like 80/20 on swing trading. Hard to tell on intra-day scalping.

I can tell that you just hammered this out on the fly but I must say 'bravo', the essence of which is superb.

 

[brownsfan019]

You bring up some valid points... Can this statistic be validated? If so, how and by whom? Vendors? Brokers?

I would venture to say that like many businesses, the longer you are in the trade, the more likely you are to be successful. For example, when I was a stockbroker we knew that 60-75% of new trainees were not going to last longer than one year. That's intimidating when considering a career; however, for those that can last 1 year, the success rate increases dramatically and if you can make it to 3-5 years, we knew that there was a strong likelihood that you would be a great broker. That's all we needed - time.

So, I would venture a guess that trading is very similar - as time progresses, the field gets much smaller but for the traders remaining, the reward is substantial. I would also guess that if you can 'last' to 5 years of trading, that you have a much greater chance of being a profitable, successful trader. The catch is that many people get into trading b/c the $$$ is so close, yet few will actually achieve b/c they are not willing to treat this like a business that requires YEARS of training and practice. You can open a futures account for 5 grand and eliminate that account in no time and be a 'failure'. Did that person ever have a chance to begin with? Probably not. And now there is another failure for vendors to use to help 'protect' the next newbie out there.

 

[ecritt]

Quote from DrEvil:

Everyone has heard that 90% of retail traders are losers. That's an interesting statistic but what I would like to know is how does that number change if you consider number of years trading.

Could it be that a large chunk of that 90% is made up from novice traders that blow up within 6 months never to trade again.

It's guess work but I would think that 70% of retail traders that have been trading for 2 years are losers ... possibly less than 50% of retail traders who have been in the game for more than 6 years are losers.

Can anyone answer with more authority? I think this is worth discussing.

If I remember correctly there was an academic paper that supported this claim. They took a large sample of retail brokerage accounts and compared their annual returns to those of a passive stock market index. They found that 80 - 90% of retail traders performed worse than the mindless index.

I'm coming up on my tenth year in the industry and so far my observations suggest that the same is true of "professional" investors as well. From what I've seen most "professionals" show essentially the same behavior traits as retail but suffer the added burden of marketing, client hand-holding and compliance workloads.

Over the past few years I've been keeping track of diversified mutual funds (more than 200 holdings) and benchmarking them against various benchmarks like the Russell 2000 total return and the S&P 500 total return. My findings suggest that approx 80% of mutual funds underperform the relevant market. Those that did outperform seemed to do so by a modest amount. However, many of those that underperformed did so in a severe way.

So maybe it's not about "retail" vs. "professional". Maybe 80/20 or 90/10 is simply a natural phenomenon.