Millennials Make a Killing Day Trading on Reddit


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.

Big data analysis, algorithmic trading, and retail trader sentiment.

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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.

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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, — Q1, and came to some very interesting conclusions.

The first is encouraging: The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, through Q1, 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.

And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. 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. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades.

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: 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? In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. What if I offered you a simple wager on a coin flip? You have two choices. Choice B is a flat point gain. Which would you choose? Yet many studies have shown that most people will consistently choose Choice B.

In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making.

His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: Why should we then act so differently? Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. We need to think more systematically to improve our chances at success.

Avoiding the loss-making problem described above is very simple in theory: But how might we do it concretely? When trading, always follow one simple rule: This is a valuable piece of advice that can be found in almost every trading book. If you target a profit of 80 pips with a risk of 40 pips, then you have a 2: If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades.

What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1: That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. We will discuss different trading techniques in further detail in subsequent installments of this series. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading.