Trading To Win Or Not To Lose

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The Problem of “Trading Not to Lose” and Overcoming It

Trading not to lose is an issue almost every trader will face at some point in their trading career. Learn why trading with fear can cause a host of problems, then learn how to better handle that fear so you are making better trading decisions.

I was recently reading one of Doyle Brunson’s books–he’s a no limit hold ’em poker legend–where he talks about this issue in the poker world. In order to be a great poker player you need to be opportunity seeking, and not afraid to put your money at risk when there are opportunities to exploit your edge. Ultimately, great traders, athletes, poker players, or anyone at the top of their field, share one similar trait: they aren’t afraid to lose. They go after it, have a killer instinct, and want to take every opportunity they can to implement what they have practiced and studied.

Trading not to lose causes major problems for traders. Here’s what it is, why it’s problematic, and how to get yourself into an opportunity seeking mindset.

Trading Not to Lose is Fear-Based Trading

As traders, we want to respect the market, but not fear it. It’s neither our ally nor our enemy; it’s a neutral sea of both potential and risk. Trading out of fear means we are too focused on the risk, and are unlikely to capitalize fully on the potential.

Trading not to lose, which is fear based, can cause the following symptoms (some or all) to develop:

  • You try to guess which of your trading signals are likely to be winners in an attempt to avoid the losing trades. By skipping signals you move away from your tested trading plan and strategies, and randomize your results. This is known as “trying to outwit” your trading plan.
  • Losses aren’t taken when the stop loss level is reached. The loss is allowed to run, resulting in bigger losses than planned. Fear is a tricky thing in that it can cause us to get more of the very thing we are trying to avoid. When we are afraid to take a loss–because we haven’t fully accepted that losses are a natural and regular occurrence in trading–we may actually try to avoid taking losses and thus run our accounts into the ground. This is an element of “loss aversion.” It’s important to understand, on a belief level, that losses are part of trading. They can’t be avoided, and trying to avoid them may actually cause more damage.
  • Trades are not allowed to develop. Contrary to the problem above, the trader is afraid of any sort of loss, or of a small winning trade turning into a loss. The trader knows the market gyrates back and forth, but they are “jittery” and therefore don’t allow their winning trades to compensate them for the risk they are taking. The trader continually gets out of trades at a small loss or profit even though their stop loss is in no danger of being hit at that moment, and the price hasn’t reached their target.
  • In general, fear can cloud judgment. In real-time, the trader may be so afraid to lose they don’t even see opportunities occurring. If you continually see trades (that you should have taken based on your trading plan) only in hindsight, fear may be causing you to actually filter out information and cloud your perception.

These are symptoms of trading not lose. Trading not to lose is a product of focusing on whether we win or whether we lose. But winning or losing actually shouldn’t be our focus.

As traders, it’s our job to come up with (or learn) strategies, develop a trading plan, and then rigorously test that plan for profitability and our ability to personally implement the plan.

Once we have a plan, our goal is to trade according to that proven plan. The plan is researched, backtested and/or traded in a demo account, and then traded live with small amounts of capital until the plan is proven successful. Wins and losses take care of themselves. While we are trading we can’t care about wins and losses…we only care about following our plan and trading every valid opportunity our trading plan gives us.

When we aren’t trading that is when we can look at our wins, losses, profitability, and trading stats to possibly make adjustments if needed to the plan. But this doesn’t occur during trading; while trading and holding positions our focus is only implementing our plan.

This is easier said than done, but understanding and accepting the following will help.

Believe in Probabilities

While winning is the ambition of traders, “not losing” actually ends up being the dominant factor that affects trader’s decisions. This is because it is very easy to have knowledge of risk, but it is something entirely different to believe you can overcome it. This requires an internal “belief” change, not just knowing that a change is required.

In an effort to not lose the aforementioned symptoms develop, resulting in the trader losing their capital. How can we change our mindset to help avert this?

Consider “the house” or casino in a game of blackjack. Each trade you make represents a hand of blackjack. There is the house (a buyer or seller), and there is the gambler (a buyer or seller on the other side of the trade). The difference between them is that the casino owner has a percentage edge over the gambler. Disciplined traders also have an edge, and can therefore be equated to the house or casino owner.

While playing blackjack have you ever seen a casino owner run downstairs to stop a hand of blackjack from occurring because he thinks he might lose on that hand? Never. Gambling regulations aside, casino owners actually want as many hands as possible to be played because they know they have an edge on each hand. Casino owners also know something else: each hand is independent of other hands. Anything can happen on a single hand! The casino owner knows we can’t predict which hand is going to make the house money and which is going to make the gambler money. All he knows is that each hand is independent–in that anything can happen on a particular hand–and that he has an edge over many hands.

Over a great many hands the casino holds a 3.5% to 4.5% advantage, varying based on house rules. While the casino may lose tons of hands, at the end of year they are likely to have made 3.5% to 4.5% on all the bets placed at their blackjack tables. The more bets placed, the more the edge is exploited, the more profit they make.

The bottom line is that traders need to adopt the “casino owner mindset,” realizing the result of each trade is unpredictable and therefore every valid trade, within the context of the trading plan, must be traded. Also, know that trades are independent of each other. While you may have a string of losses, that doesn’t mean there is something wrong. Allow your edge to play out over many trades. Trust your edge, as the casino does, that over the course of a week, month and year your edge will produce a profit. This assumes you have edge, which is why you need tested strategies.

No single trade matters to a pro trader. Whether it is a win or loss makes no difference. The only thing that matters is exploiting the edge and taking valid trades, because over the long run all those losses and wins will make the edge (profit) materialize. And the nice thing about trading is that traders can create a much larger edge than the casino has.

Reading or understanding this analogy won’t create any change in behavior, it needs to be incorporated into your belief structure for change to occur. Incorporate it into your belief structure by meditating on the concepts, write down notes and your thoughts related to it, so that it begins to seep into your brain, overtaking the current belief structures you have about the market which result in ‘trading not to lose’. Put notes beside your computer, and continually remind yourself to adopt the “casino owner mindset,” and all that it entails.

Final Word on Trading Not to Lose

Adopt the casino owner mindset. If you do so, you won’t care about whether you win or lose a trade. You will be more open to seeking opportunities. If your system is proven, over many trades you know you have an edge and profits will come. Take every valid signal you can, so your edge materializes. Think of it this way: if you know you can win 60% of the time by guessing heads on a coin flip you’d be trying to get as many people to bet you as possible. The same goes for trading. If you know you win about 60% (even 51% of the time, or 40% if you make more on your winners than you lose on your losers) of the time you should be taking every valid trade you can so you can exploit your probabilistic edge. If you try to figure out in advance which coin flips or trades will be winners and losers, you become the sucker.

For more on these topics, see the interview with Mark Douglas, trader and author of The Disciplined Trader and Trading in the Zone. His books are definitely worth the read, and that interview discusses some of the topics from those books.

If you want to improve your forex trading, check out my Forex Strategies Guide for Day and Swing Traders eBook.

Over 300 pages of Forex basics and 20+ Forex strategies for profiting in the 24-hours-a-day Forex market. This isn’t just an eBook, it’s a course to build your skill step by step.

Trading To Win or Trading To Not Lose?

Trading To Win or Trading To Not Lose? by Talking Wealth Podcast: Stock

Whether you are a share trading or investing, are you playing to win? or are you playing to not lose?

95% of retail Forex traders lose money – Is this Fact, or Fiction?

Updated: September 22, 2020

There is a well known statistic being passed around the Forex community and there is a good chance you’ve come across it, possibly numerous times. Basically, it says that ‘95% of Forex traders lose money’.

For traders who are chasing their dream of becoming a full time Forex trader, or at least trying to achieve even part time trading success; this statement can be a bit of a demotivator.

If 95% are blowing up their accounts, the statistics imply you also will be become one of the losses.

It’s not a very comforting thought is it! In a world of failing traders, what steps can you take to become the minority who survives and make consistent returns from Forex trading?

In this article I want to do some investigating. We are going to try verify the claim ‘95% of Forex traders lose money’. We’re going to go over some supporting evidence, and attempt to conclude if this just a phrase used for scare tactics, or if it is actually based on fact.

Special thanks to War Room member ‘kin’ (marketstudent) for helping me compile the information contained in today’s article.

Let’s go through some of the factual evidence we’ve dug up that supports the statement…

The Evidence that Forex traders lose money

China bans Forex margin trading

According to a Reuters article in 2008, the China Banking Regulatory Commission banned banks from offering Forex margin trading to their clients.

“Eighty to 90 percent of players in Forex traders lose money, through banks providing the service were generally making a profit from it, the banking regulator said.”

This quote is useful but far from conclusive.

The profitability of day traders

“The profitability of day traders” was an article written by Douglas J. Jordan and J. David Diltz, published in the Financial Analysts Journal (Vol. 59, No. 6, Nov-Dec 2003).

If you want to read the full article you will have to pay for it, but the abstract reads as follows:

“We used two distinct methodologies to examine the profitability of a sample of U.S. day traders. The results show that about twice as many day traders lose money as make money. Approximately 20 percent of sample day traders were more than marginally profitable. We found evidence that day-trader profitability is related to movements in the Nasdaq Composite Index.”

All this really does is support our own views on day trading. It’s harder and riskier than the longer term swing trading. But, this still isn’t enough to nail down the statistic as fact, so let’s move on…

The Cross-Section of Speculator Skill: Evidence from Taiwan

“The Cross-Section of Speculator Skill: Evidence from Taiwan” is a research paper by Barber, Lee, Liu and Odean published on 14th February 2020 on the Social Science Research Network.

Using data from the Taiwanese Stock Exchange, the performance of day traders over the 15 year period 1992-2006 was evaluated.

The following quote on page 13 is particularly relevant:

“In the average year, 360,000 individuals engage in day trading. While about 13% earn profits net of fees in the typical year, the results of our analysis suggest that less than 2% of day traders (1,000 out of 360,000) are able to outperform consistently.”

This is a very alarming statistic, only 2% of these traders were consistently profitable. Remember though, this study only had day traders under the microscope, and didn’t look any other style of traders. Let’s look at some evidence from the brokers themselves, which factors in a broader range of trading styles.

U.S. Commodity Futures Trading Commission Regulations

The U.S. Commodity Futures Trading Commission (CFTC) introduced new regulation in October 2020 forcing US brokers to lower the amount of leverage that can be offered to customers (maximum limits are 50:1 on major currency pairs and 20:1 on other currency pairs).

US forex brokers are now also forced to disclose the percentage of active forex accounts that are actually profitable.

Michael Greenberg of Forex Magnates has compiled the data for the first quarter of 2020.

The Magnates chart tells us that during the first quarter of 2020, the US brokers listed here reported that an average of

25% of their ‘active’ accounts where in profit. This is a dramatic increase in percentages that we’ve seen in the other reports we previous covered. This data however is still not good enough to start base conclusions that 95% of Forex traders lose money on for the following reasons.

  • The chart only shows a handful of US brokers. Aside from Africa, the US actually has the smallest of the retail trading population
  • The data collected is only really from a 4 month period, which is hardly anything
  • The data doesn’t specify if withdrawals and deposits are taken into consideration
  • The data doesn’t show if those accounts are experiencing growth over time, or are just simply ‘up’ from their previous 4 month figure
  • To reinforce on the last point, are these profitable accounts over their ‘high watermark line’, or have they suffered a massive loss, but recovered a small percentage within the 4 month period therefore considered ‘in profit’

The new CFTC disclosure requirements are certainly a step in the right direction towards greater transparency in the Forex industry. However, it is important to treat the percentage figures of winning and losing accounts with a degree of skepticism for the following reasons we just stated.

All of the brokers will be eager to present themselves in the best possible light – so it would not be too surprising if the figures were subject to some manipulation. If a broker can claim to have a higher percentage of winning accounts than their rivals, this may attract new customers to open up accounts with them.

It is important to note that the data only includes “active” accounts (and the definition of “active” maybe interpreted differently by different brokers). We have no idea how many new accounts blew up in their first few months of Forex trading and subsequently became “inactive” (and thus were omitted).

Oanda in particular have been guilty of some creative accounting – their data from Q3 2020 showed that a spectacular 51% of accounts were profitable, 18% more than the nearest competitor. However it turned out that included in their definition of “active” accounts were accounts that contained no trading activity but had simply accrued interest on the account balance!

The CFTC quickly put their foot down and 6 months later we see that the percentage of winning accounts at Oanda has dropped to 38.1%.

As disclosure requirements tighten in the future, these winning percentages are expected to fall even further.

What conclusions we can make from the data

Even with all the digging we’ve done, and all the evidence we have sifted through, we simply still don’t have enough data to conclusive confirm that ‘95% of Forex traders lose money ’.

One thing is for sure, it doesn’t look good for day traders. The evidence is basically conclusive that only

2% of day traders can actually consistently turn a profit. This is no surprise to us though, we know day trading is a really stressful and tiring way to approach the market.

Day traders are required to sit in front of the computer for hours on end, staring at price charts while waiting for an intraday trade opportunity to present itself. Most of the day trades are placed with the intention of quickly being in and out of the market over a span of a few hours. With so many retail Forex traders engaging in scalping or day trading strategies, I am not surprised that most Forex traders lose money .

This combination of high frequency trading, and staring at charts all day is very psychologically taxing. Most day traders are failing because their patience wears too thin. They begin to do silly things in the market out of boredom, fatigue or frustration. Swing traders like us, use the core movements from the higher time frames to take easy, longer term trades. Swing traders ride out the dominant market direction it much stress-less fashion.

By doing things like trading with the daily time frame, we don’t have to spend much time in front of the charts. This gives us the freedom to set our trades, and not have the burden of constantly monitoring them for hours. The idea is to be less involved with the market as a whole.

Even though we don’t have anything 100% conclusive to support ‘95% Forex traders lose money’ it’s pretty safe to conclude that a ‘high percentage of Forex traders lose money’.

We have a few variations of this statement that we believe to be justified…

“100% of traders blow their first trading account”

“95% of Forex traders lose money during their first year of trading”

“High frequency traders find it harder to make money consistently than long term traders”

How can you avoid becoming a statistic?

All of the anecdotal and hard evidence examined in this article strongly suggests that Forex traders lose money and the vast majority of traders are not profitable. It is not really possible to arrive at an exact percentage, but we can see that the most conservative estimate suggests that 87% of traders lose. So the soft quoted 95% statistic may be a little high, but it is fair to say that trading is NOT easy.

So how can we as traders avoid being one of the losing statistics. What are the small minority of successful traders doing that everybody else isn’t?

By working with many traders in our Price Action War Room, we’re always on the front line witnessing how traders are ‘shooting themselves in the foot’. Traders who struggle to move forward, and hindering any positive progress with their trading goals all seem to share some similarities.

  • The trader doesn’t have realistic expectations about the market
  • The trader is over complicating their analysis, trying to make sense of too many variables or looking ‘too deep’ into things
  • The trader is in a bad financial situation and trading with real money that is needed for bills, mortgage etc.
  • The trader is not using positive geared money management to ensure winning trades outperform losers
  • The trader is trading on low time frames, chasing price and market noise instead of using more reliable data from the higher time frames
  • The trader is spending way too much time in front of the charts and over trading
  • The trader has no trading plan and therefore no consistency
  • The trader opens positions during news releases hoping to catch big moves
  • The trader doesn’t know how to take a loss
  • The trader is impatient and doesn’t wait for high probability trade setups

When you read through that list, how many points are you guilty of? I would bet at least a few. Don’t worry, you’re not the only one. These are everyday issues which traders struggle with and really do hinder their progress of becoming a profitable trader.

Most of the problems are generally a result of psychological weakness. Traders are ‘giving in’ to their inner demons. Unfortunately most traders never build on the character and psychological traits needed to fight these inner temptations. You really need step up, and work on personal improvement to build what it takes to be a good trader.

It’s like a smoker, drug user, or an alcoholic working to overcome their addictions. Deep down they know it’s destroying their health and lives. If they’re not determined and focused enough, it’s easy to fall back into bad habits and start a vicious cycle all over again.

The market will rip you apart, psychologically, in ways you never thought possible. The financial sector is a cruel world which can easily reduce a grown man to tears. It’s important that you understand what your weaknesses are, and face them head on. You’re going to have ups and downs in your trading journey, but just remember …

“What doesn’t kill you will make you stronger”

Do yourself a favor and go back through your history and study your losing trades. Get a pen and paper and make a list of what you think you did wrong when executing each of those losing trades.

I bet you will see a common problem reoccurring on that list. Have that list in front of you when you go to take your next trade. Use this list as a nice reminder of last few times you’ve ‘traded against your better judgement’. Hopefully that it will deter you from making the same mistake again.

Start to tackle your trading weaknesses and self improving to make yourself into a better trader. Give yourself a higher chance of not becoming a fatal statistic. Most Forex traders lose money, but that doesn’t mean you have to. If you’re struggling to find a trading system that doesn’t require you to sit in front of the Forex charts all day.

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Best of luck to you on your trading journey.

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