Last Updated on June 19, 2022 by Quantified Trading
What percentage of traders fail? What percentage of traders are successful? How likely are you to succeed as a trader? Frequently, we read that 90% of traders fail to make money and just a tiny fraction of traders are able to make money over time. Is this number correct?
Our research suggests that about 70 to 90% of traders lose money. It is, of course, impossible to get an exact number, but as a rule of thumb, we believe 70-90% is close to the “correct” ballpark figure.
Below we argue for how we came to the conclusion that 70-90% of traders lose money. We start by looking at the undeniable fact that the majority of CFD traders lose money:
What percentage of CFD traders lose money?
Brokers are required by law to disclose the percentage of traders losing money trading CFDs.
CFDs? What is a CFD?
CFD is an abbreviation for Contracts For Difference. It’s a contract between two parties where they bet on the direction of the market. CFDs are derivatives and thus the price movement depends on the underlying financial asset. It could be stocks, an index, commodities, etc.
If you are bullish on Apple (AAPL) you buy a CFD contract and another trader bets against you by selling their long position or going short. It’s a 100% zero-sum game, even negative adjusting for slippage and commissions. A CFD contract has always two different parties profiting inversely: one winning and one losing. Most CFD brokers make a profit by the bid and ask differentials.
What does the fact tell us? The brokers’ respective web pages tell us the following:
- 58% of retail traders lose money when trading CFDs with Interactive Brokers.
- 65% of retail investor accounts lose money when trading CFDs with SaxoBank.
- 67% of retail investor accounts lose money when trading CFDs with eToro.
- 71% of retail CFD accounts lose money with CMC.
- 72% of retail CFD accounts lose money with 500Plus.
- 81% of retail investor accounts lose money when trading spread bets in IG
As you can see, the numbers vary from broker to broker. We suspect it is no coincidence that Interactive Brokers (IB) has the best numbers because IB attracts “serious” and better capitalized traders.
But the average percentage of losing CFD traders is 69%, far lower than the 90% referred to.
What percentage of traders fail at Robin Hood
Robin Hood has gone from nothing to go public in a short period of time. Because of their app, they have attracted a significant number of new and young traders.
In October 2020 Barber, Hung, Odean, and Schwarz published a study that looked at the performance and behavior of Robin Hood’s investors between May 2018 and August 2020. The study, named Attention Induced Trading and Returns: Evidence from Robinhood Users, concludes the following:
Average 20-day abnormal returns are -4.7% for the top stocks purchased each day…..Large increases in Robinhood users are often accompanied by large price spikes and are followed by reliably negative returns.
Most Robin Hood traders are inexperienced and they tend to chase performance that later regresses to the mean. Moreover, the Robin Hood app has no commissions and draws attention to the most traded stocks and those that are in play. It’s a sucker’s game, concludes the report.
The report doesn’t give any percentage numbers of failed traders, but it’s clearly a very low number of traders who make money.
Why do traders fail and lose money?
Why most traders never succeed is first and foremost that the market is rigged so just a few players make consistent and good money. Victor Niederhoffer wrote in The Education Of A Speculator that the main purpose of the amateurs is to provide prey and energy for the bigger players further up the food chain. Trading proves that Niederhoffer is somewhat right. Most traders end up losing money and even ruining their accounts.
Why is that?
That is because the markets are competitive and are in the short-term more or less a zero-sum game. It’s the same as in poker: only a few can win.
To increase your odds you must understand the market Who are your rivals? Who are the predators?
We can compare trading to long-term investing which is not a zero-sum game. During the last century, most developed countries have witnessed 7-10% annual returns. This is because it’s not a zero-sum game:
Companies earn money through increased profits and the US Treasury keeps on increasing the money supply. You must have been unlucky or a poor investor NOT to make money as long as you have a diversified portfolio. You can simply be patient and build a stock or mutual fund portfolio and you have a pretty decent chance of making a profit in the long term. You just need to be patient.
Long-term investing is not the most exciting thing in the world and it takes years for it to snowball and compound. We have covered investing and trading in a separate article called trading or investing – what is best?
In other words: why most traders never succeed is mostly due to the markets: all can’t win. However, to improve your chances you need to do research and work hard. Trading is a scalable career and you can make money faster than long-term investing but at the cost of failure.
One of the most important aspects of trading is to avoid unforced errors, to use an expression from tennis. Knowing how to fail as a trader is just as important as knowing how to succeed as a trader.
How to avoid losing money as a trader
We believe a quantitative method like we do here on this blog is the best way to get consistency over many years. By all means, it’s not easy, but you have better odds, in our opinion. The downside is that it’s labor-intensive. Backtesting requires a lot of work! We believe it’s a prerequisite that you enjoy backtesting. If it’s enjoyable you improve the odds substantially.
Woody Allen is famous for saying that 80% of the work is just showing up. It’s partially the same in trading. If you can survive the learning curve and build competence and experience, you improve your odds significantly.
- The correct mindset for trading
- Habits of wealthy and successful traders
- Street smarts beat book smarts in trading
- Why programmers and traders are bad traders
What percentage of traders fail? Ending remarks
Do most traders lose money? Yes, because short-term trading is mostly a zero-sum game. This is the most important lesson about trading!
What percentage of traders fail? We have looked for evidence but it is, of course, very hard to find the exact answer. However, from the research, we have seen we believe the ballpark figure is between 70 to 90%.