31st July 2019
So, you have recently started trading or you may have been trading for a while and now you’re trying to figure out if trading forex is worth your time and investment. And most importantly, can you make a successful trading career?
You may have noticed that an aggregated average percentage of retail investor accounts (aka individual traders) that lose money is 78%. While this number may seem quite high, what matters is to find ways to become part of the successful category. The statistics only show how difficult this journey can be. If you weren’t intimidated by the numbers in the first place, kudos for your ambition.
Just like Rome wasn’t built in a day, nobody becomes successful overnight. It takes time, strategy, discipline and consistent trading until your efforts pay off. Quite a few novice traders dive in with the all-or-nothing attitude. Practice makes perfect, remember? What is more, choosing to learn from your own mistakes rather than giving up is what determines a winning mindset.
“The majority of day traders quit relatively quickly (more that 75% of all day traders quit within two years), and poor performers are more likely to quit. These results are consistent with the models of both rational and biased learning. In this respect, [...] learning is an important factor in the behavior of individual investors.”1
If 78% of day traders lose money, then it’s logical to assume that the other 22% win, right? Well, not really. This number is just as obscure and practically impossible to measure with an absolute accuracy for a number of reasons.
How do you define success in trading? Should we consider breaking even a positive result? While making small profits is better than nothing, they are mostly insignificant to sustaining a lifestyle as a full-time trader.
Statistics suggest that only 2.5% drop out within the first month. “Survival rates at one, two, and three years are 44%, 24% and 15% respectively.”1
After long hours of research, we noticed an interesting pattern: few people who continued trading for months, regardless of their fruitless activity. Most of them started making money after 6-7 months. Could this be the holy grail of switching to profitable trading?
Consistency and continuous analysis of your trading activities and strategies can propel the success rate anywhere between 10% and 30%. Consequently, a retail investor has about 20% chance of becoming successful after 6-12 months of meaningful work. Not excited by the numbers? You should be, as sticking to trading for long enough can quadruple your chances of winning.
Most traders start generating money after 6-7 months with 20% success rate.
If the above hasn’t sunk in yet, we have to make a very clear statement: it’s not luck that determines how much of a good trader you are, but how much you are willing to learn from your mistakes.
Some people associate forex trading with gambling, but this can’t be further from the truth. “Investors who are pre-disposed to playing lotteries also exhibit strong preferences for lottery-type stocks in their investment choices. Poor investors [...] experience the most severe under-performance from their gambling motivated investments.”2 This is mostly due to the fact that gamblers’ rationale is overridden by emotions and they are driven by the desire of quick and easy income.
Gamblers underperform non-gamblers.
As discussed above, those who trade on a regular basis and are mentally strong to get over their trading mistakes and losses, are more likely to spring back and offset their underperformance. Unlike those, who defeated by emotions and negative balance, will make just a few more vague attempts and eventually back off from their trading career.
The rule of thumb is to never invest more than you’re ready to lose AND to not fall victim to false impressions aka “how to become a millionaire trading forex in X weeks”. You know the type of deceitful investment program plans we’re talking about. We’ve seen them, too.
Avoid investing in programs that sound too good to be true.
Based on some sources, only 1% of all day traders really make money. According to some more optimistic sources, the success rate can range between 3.5% to 4.5%, which can be further improved to 6%-10%, if a retail investor seeks guidance from a mentor. Some very talented mentors report pushing the success rate to 25% and above. Just like with anything exceptionally good in real life, you’d have to pay a hefty price for a stardom mentorship or be selected and accepted by the mentor. It is often the case that one must possess particular personality traits and capabilities to be chosen by a very picky day trading coach.
We can also assume that with the introduction of copy trading, novice traders’ chances of placing profitable trades have at least doubled. Even then, your chances of making money on forex is not risk-proof and you still need to perform your research and due diligence.
Trading with a mentor or through Copy Trading is not 100% risk-free.
A study performed by Warwick Business School shows that women outperform men at investing by 1.8%. Reason? Men seem to be drawn towards more speculative stocks, while female investors stick to a more long-term perspective. Besides, driven by hormones and remuneration sentiment, male traders are 2.5 times more likely to break day trading rules than women. What is more, men are less likely to admit they are wrong, and while their egos inflate, their wallets flatten.
Women are better investors than men.
Studies and statistics:
1 - Barber, Lee, Odean: Do Day Traders Rationally Learn About Their Ability?
2 - Kumar: Who Gambles In The Stock Market?
3 - WBS: Are Women Better Investors Than Men?