Monday, September 29, 2008

The Real Reason 95% of Traders Fail

You’ve all seen this statistics that are anecdotally given out at trading forums, seminars and the like. And I’ve always thought to myself, wow, is it really that bad? I mean I’m not that smart and I don’t work that hard that I should be in the top 5% right?

This Saturday I had an interesting discussion with a fellow trader who’s been successfully trading the markets for longer than I have. He told me that he’s had guys come to him for help before (having heard that he knows how to trade) and he will ask them to please read a certain trading book. The next time that person talks to him they tell him that they purchased the trading book and are reading it. And so he asks them, “Do you have the book right in front of you?” When they invariably say yes he says, “So on page 114 paragraph 2 what does it say?” 9 times out of 10 they log off IM and he never hears from them again.

To me this is an incredible story. The “average trader” doesn’t have the commitment to go purchase and read a book that is $15 and then has the audacity to lie about it. What does this say about the “average trader”? In my mind they are a total joke. No wonder 95% fail if this is the pool of “average traders” that exists. I mean how is that trader going to actually test a methodology if they can’t commit to something so simple? How will they ever endure the painful and psychologically debilitating process that is a prolonged drawdown? The answer, I believe, is that they cannot. And that is why 95% fail.

But for those of you who are capable of the blood, sweat, and tears that are required to learn about, create, and test trading systems I feel very confident that 95% of you will succeed. Where did I get this statistic from? I just made it up. But seriously, I have never met a trader that has done his homework for 3-5 years who hasn’t been successful. Thus, in my mind the only trader that I ever have to really compete against are the 5% that can actually do their homework.

For myself I have my own litmus test as to the longevity of a potential trader. Can you commit to testing your trading idea (either candle by candle, backtest, or forward test) for at least 60 trades? If you cannot do this simple exercise then quit now, for you will never succeed. If you can then congratulations! Welcome to the 5% club.



Jules said...

You're right. When I used to put in 8 hours at work, maybe 10 sometimes, and stay up to write a really good paper twice a year, now I spend 20 hours a day learning how to trade! It's a lot of sweat (no blood yet, thank God), but I wouldn't call it hard work, coz it's totally satisfying. The best job ever :-) If it pays handsomely, it will be even better :-)

Lord Tedders said...


20 hours a day! Wow, you make me look like a bum :)

But in all seriousness, yes dedication and hard work are required. And just because we enjoy it doesn't mean it isn't work.


Anonymous said...

So? What was the title of the book man?!

Lord Tedders said...

It was Short Term Trading in the New Stock Market by Toni Turner.


Jules said...

That's why D ran out of clean socks and Al fell sick :-(

You have a day job, LT. I don't.And I suffer from chronic insomnia :-)

Toni Turner's books are novice-friendly. And she's funny.

forex trader said...

Jules, How mach you already study?

Jules said...

I've studied a bit of everything , stayed with the ones that I understand, and threw out the ones that I don't. Among those that I just simply cannot understand are Elliot Waves, OPTIONS, esp OPTIONS strategies (really GREEK to me - pun intended), Fib arcs and fan (I'm happy with just Fib retracement and extensions)and many many others.
I am familiar with TA indicators. I know more about FX than futures. I know more about investing than trading (which is why I don't believe in buying and holding stocks - Buffet's era is really HISTORY). I know enough about mutual funds and structured products like CDOs to not want to invest in them or promote them (when I was with the bank some time back).

My learning curve was steep at first when I merely read but did not even paper trade. That was in Sept 07. Since Nov 07, I started paper trading and it helped me to absorb what I've read a lot faster.

But I stopped shortly after, and picked up again only in June (4 months ago?). From June to now, it's mostly application of what I've learnt. I've hardly had the time to read any books now. I hardly have time to finish reading all the blogs I've bookmarked. I spent most of my time analyzing chart patterns and price movements. I've spent days studying DOW from 1900 on, wanting to figure out what caused the break outs, the plunges, the rallies etc etc. I used TIMES archive profusely to track events that might have triggered the historic moves. I spent a fair bit of time on the genesis of US'financial and housing crisis. You get the drift....

I don't understand automated trading systems and anything to do with ratios. When I open a book, I don't want to see charts and ratios and rules. They make me close it almost immediately. I skipped most of Toni Turner's charts. The only charts I will look at are Steve Nison's charts coz I understand candlesticks.

I don't study systematically. I can't be taught by any mentors. I challenge my teachers. Everything comes to me in a mess and that's the way I like it coz I can then take the bits I want and discard the rest, then start using whatever I have to create some form of structure that makes sense to me.
I have many books on trading and investing, but have read from cover to cover only a handful of them. For Forex, my favorite is "Bird watching in lion country" by Dirk Du Toit, and "FX and Money Market" (for bankers).

Don't know if I answered your question...

Anonymous said...

So, this story was fairly interesting story until the part where the more senior trader asks the newbie what on page whatever.

What retarded way to display loserness. "So you really have it? Huh? What does Frodo tell Sam on page 210? Huh?"

If you know that someone isnt doing they're homework. Why bother being retarded about. Why waste your time?