The Ultimate Reason for Failure

BarroMetrics Views: The Ultimate Reason for Failure

The 14-week course (I called it Ultimate) I have been running is coming to an end. As is almost always the case, I have received as much as I have given. In particular, I have had shed some light on the two questions I constantly  ask myself:

  1. Why do so many traders fail?
  2. How can I help change that result?

That most traders fail is a part of trading folk lore. Now, we are seeing some studies that confirm the lore.

In 2011, FCXM produced two studies of its FX client base.The first showed the number of winning trades the base had for each pair (see Figure 1). Except for the AUDJPY, all the pairs showed a win rate of greater than 50% (53% and up). On that basis, we could assume that the majority of traders ought to have positive returns.

Figure 2 shows how wrong that assumption would be.

I looked at the results from two angles.  In the first, I calculated the expectancy for each pair using the formula:

(Avg$Win x WinRate) + (Avg$Loss x LossRate)

If we did it this way, the only pair that showed a positive expectancy is the AUDNZD. Every other pair showed a negative expectancy.

The second was to work out the average winrate, average  $win, average $loss and average loss rate.

(Avg$Win x WinRate) + (Avg$Loss x LossRate) = (52 x .6023) – (94 x .3977) = (6.06).

Again a negative expectancy.

One takeaway from the study is the reason for the high failure  rate is: relative to the win rate, most traders are losing too much money per trade i.e. they are cutting their winners and riding their losers.

The maximum “cut your losses and let your winners ride’ would have to be one of the first lessons a newbie learns. And yet….????? The fact most traders don’t do it, suggests that the solution does not lie with merely being aware of the lesson. In other words, we can pile on the stats establishing this fact and we will make little (or no change) to the dismal failure stats.

What Ultimate confirmed was the neurological studies of the cause of the problem, and its possible solutions. (more tomorrow)

fxcm-study-winrate.png

FIGURE 1 FXCM WinRate

fxcm-study-expret.png

FIGURE 2 AVG$Win/Loss

9 thoughts on “The Ultimate Reason for Failure”

  1. Hi Ray, could we also interpret those pair win% figures to say that the sentiment indicator is correct? just that the trade plan fails?
    cheers Baz

  2. Ray,
    Market sentiment is the general prevailing attitude of investors as to anticipated price development in a market.
    Often brokers have charts showing the punters orders ,whether the majority are long or short.
    My thought was, if they had high win rates, that the charts may be effective in picking market direction,initially. On second thought it may be better to do the opposite as they are staying in too long on losing trades.
    cheers baz

  3. “let your winners ride”
    – HOW?
    a. trailing stop?
    b. increasing position sizing?
    c. scaling in as taught in HOS 2O11?

  4. Hi Paul

    As far as I can make out from the survey, the stop loss was not a consideration. The only question was the size of the loss – not why it was incurred.

  5. Dear Ray,

    We have had one incredible run in the Indian Stock markets. It is euphoria. One thing I have noticed is that that suddenly people are becoming risk averse. People who have not traded in months are hitting the market as if there is no tomorrow. The bet size has increased exponentially…And there are people who always hold on to losing trades.

    What are the highlights of this Ultimate course. I did not know you had something called Ultimate course.

    Reagrds,
    Manish

Leave a Reply

Your email address will not be published. Required fields are marked *