Why 95% of Traders Fail—And How To Not Join Their Ranks

We all know the industry legend that states 95% of traders fail.  Unfortunately, this statistic is very real.  Most traders lose money and give up trading.  Very few traders will survive the trading journey long enough to reach a place of consistent profitability.  That is the unfortunate truth.  However, why do most traders fail?  If one could identify why most traders fail, and then simply adjust behavior according, the probability of possible success as a trader could exponentially increase.

Although there are exceptions to this rule, common sense tells us that traders must fail due to one of two reasons:

#1—Positive Expectancy

A trader’s trading strategy must yield positive expectancy, meaning that when the strategy is backtested over historical data, the strategy must make money.  If it does not, then the strategy yields negative expectancy, and it should be discarded.

#2—Failure To Execute Strategy

If a trader does have a strategy that yields positive expectancy, and he is still losing money consistently, then he is simply not executing the strategy properly.  This is probably the most common cause of failure for traders.

Now, we have established the two most common reasons that traders fail.  However, the truth is that far fewer traders fail because they have a bad trading strategy.  Most strategies work.  It is a deception to think that a holy grail trading system exists that will yield consistent winners with no drawdown.  Every strategy has its strengths and weaknesses, and every strategy has certain market conditions where it will thrive and heavily outperform the broader market, and then each strategy has certain market conditions where it will underperform and suffer a drawdown.  This is very difficult for most traders to deal with.  Most traders struggle with the execution of the trading strategy.

Thus, we have systematically established the very reason why most traders fail.  Now, of course there are various explanations concerning why traders fail to execute their trading strategy properly, but primarily it is a matter of trader psychology.  Although the remedies for how one can correct this problem are many, in this article we will examine one particular method—fall in love with your trading strategy.

As a trader, you must be fully aware of every possible detail of your trading strategy.  What is its average win/loss percentage in each market condition.  For example, perhaps it tends to perform better in a trending environment—then what is its win/loss percentage in a trending environment versus a range bound market?  What is the average number of losing trades it tends to produce?  What about winners?  All of these questions can be answered in one of two ways—either through historical backtesting or through simulated live action backtesting.

In order to historically backtest your system, you must deduce it to a systematic series of step-by-step procedures; then, have a computer programmer code out the system and use a forex demo account such as MT4 or Tradestation to backtest the strategy.

If your strategy is highly discretionary and it cannot be deduced to written code, then you can purchase a forex simulator and scroll back through historical data and replay market conditions over the last ten years to evaluate the effectiveness of your strategy.

95% of traders will not take these steps, and this is a major reason most traders fail.  A traders ability to execute his strategy over the long-term is completely dependent on his confidence in his trading strategy.  If there is a slight thread of doubt concerning the reliability of the strategy, then during a period of slight drawdown the trader will abort his strategy and begin relying on “intuition” to trade, which will inevitably lead to a blown account.

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