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" Forex trading " We look through 43 million real trades to measure trader performance
Majority of trades are successful and yet traders are losing
Here is what we believe to be the number one mistake FX traders make
Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately.
Why Does the Average Forex Trader Lose Money?
The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult.
We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain.
Percent of All Trades Closed Out at a Gain and Loss per Currency Pair
Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake
Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015.
The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time.
If traders were right more than half of the time, why did most lose money?
Average Profit/Loss per Winning and Losing Trades per Currency Pair
Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake
Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015.
The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades.
Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades.
What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution.
Cut Losses, Let Profits Run – Why is this So Difficult to Do?
In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run.
When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later.
If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains.
But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology.
A Simple Wager – Understanding Human Behavior Towards Winning and Losing
What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?
