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:
- Why do so many traders fail?
- 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$Loss x LossRate) = (52 x .6023) – (94 x .3977) = (6.06).
Again a negative expectancy.
One takeaway from the study is the reason for the high failure rate is: relative to the win rate, most traders are losing too much money per trade i.e. they are cutting their winners and riding their losers.
The maximum “cut your losses and let your winners ride’ would have to be one of the first lessons a newbie learns. And yet….????? The fact most traders don’t do it, suggests that the solution does not lie with merely being aware of the lesson. In other words, we can pile on the stats establishing this fact and we will make little (or no change) to the dismal failure stats.
What Ultimate confirmed was the neurological studies of the cause of the problem, and its possible solutions. (more tomorrow)
FIGURE 1 FXCM WinRate
FIGURE 2 AVG$Win/Loss