Does 95% of Traders Lose Money ?

When I discovered forex in 2012, meaning nearly 10 years ago, I quickly read articles or content related to the fact that 95% of traders lose money. 95% ! Impressive isn’t it ? When you pursue your quest looking for indicators, tips, tools, brokers, whatever you need you still read this number. Ads as well trying to convince you to buy a new tool emphasize this point in order to make your part of this 5% of winner !

We have to admit, it is a sexy ratio. Only 5% are making money, others are just looser. On which part of the cake do you want to be ? Are you stupid like others to be on the down side. I don’t think so. It is a challenging ratio and we all want to do whatever possible to learn, progress and become regular incomes from our sexy trading.

This number has never been challenged ! But, because you can read it everywhere, it was 95% real ! If everyone is saying, it must be true ? No ? Well, in fact, there is no reference at all. It is taken as granted. But where is the underlying study where this number came from ? Have you tried to find it, or at least have you taken a look ? Probably not. I did the same. But as I’m working with data, facts and numbers everyday I like to have the origin of everything. So I did my own research. Ready to discover the truth ? And in fact, does it really change something for you ?

If you are a beginner, trade with an amount of money that is small enough so that you can afford to lose it, but large enough so that you will feel the pain if you do. Otherwise you are fooling yourself !
– Mark Minervini

Doing a quick Google Search with “95% of traders lose money” I get a little 59M answers ! Wooh, that’s a lot on the topic. Thousand of website using this number and some explaining in details the difficulty of success. But none are explaining the origin of the 95%. Very few studies have been made on the topic and especially due to the sensibility of the topic. Brokers are not willing to share internal data from their customers.

I found one of them, FXCM which agreed to share a few elements giving a good overview of real and effective performance. Number can’t be extrapolated to all the market, but this broker is definitely not a small one and the portion of their customers is a great hint for our quest. (This is not here a positive or negative recommendation to use them as a broker, this is not the subject of the topic). Study has been done in 2009-2010. This of course is not totally new or recent and the market has changed. New people came into the game. But due to the fact that this 95% statistic remains (and sometime is used for crypto as well), we can’t definitely avoid digging into the analysis.

95 Trader Lose Money Analysis

Woohoo ! We have a nice first chart ! Well, what can we learn from it ? These aggregated bar charts represent more than 12 million real trades for FXCM clients worldwide. I insist on the “real trades” ! We are not speaking about demo accounts, or tests, but real money traded on the FX Market. In Blue you can see the percentage of trades ended with a profit for the client and as you can imagine, the red one with a loss.

AUD/JPY which is the one with the “worst” ratio is really near a fifty / fifty success and all others are above this limit. For exemple, EUR/USD, one of the most traded pairs due to high volume, is at 59% of profitable trades. This first view gives us nice hints and opens some questions. Does it mean in fact that more than 50% of traders are winning in forex ? If not, what’s the reason behind it ? We need more data !

Traders lose money forex analysis

We are starting to get the second part of the story. Here we can see the number of average pips numbers won on profitable trades (in blue) and the number of pips lost in red. I will write a bit later why Pips is for me the most important metric in trading, much more important than $ or %. And as you can imagine, if the blog is named PipsFisherman, there is a related reason ! There is no doubt that on average they lose more money on lost trades than they make cash on the won ones.

The average is 94 pips lost for 52 won. On EUR/USD we have 127 lost for 65 won. If you remember from the previous graph, 59% of trades on EUR/USD were winning trades. But with a negative profit ratio, winning 1, losing 2 you don’t need a high degree in mathematics to see that the outcome of multiple trades will bring negative reward (And a very poor money management).

It’s not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong.
– George Soros

We can’t extract from this view the percentage of traders losing money (and we are speaking of regular ones, with a large number of trades, not people who just come and try and move away), but we can understand some wrong behaviors that you should avoid if you don’t want to replicate the same losses !

Your Risk Reward should be higher than 1:1

You should never lose more than what you can win. If your risk reward is 1:1 and you win the trade in fifty percent of the case then you are breakeven. If we compare the previous stats with a winning rate of 59%, a simple 1:1 ratio makes you profitable in the long term.

A complementary solution would be to increase your ratio at 2:1, 3:1 or 4:1 meaning making your wins run and cutting your losses. By doing so you trade with a strategy winning less than 50% of the team and you remain positive

Use Stop Loss

You don’t drive without your safety belt ? That is exactly the same for trading, you have to use stop to stick to your plan ! Why is it hard ? Because a trade hitting the stop means an effective loss ! If it’s still running, basically your mind expects to see the currency coming back in the right direction. But that’s totally wrong ! You can lose all the money in the account and in some critical scenarios like a flash crash losing more and you owe money to the broker ! I don’t think it’s a sustainable strategy !

I hope it was insightful enough, now go back to your desk, now adapt your strategy and stick to your plan !

Happy Pips !

Ressources: DailyFX study

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“I think investment psychology is by far the more important element, followed by risk control, with the least important consideration being the question of where you buy and sell.”

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