I already posted that the average trader at a big broker (FXCM) had a negative expectancy. Their risk rewards are around 0.5-0.6 with winrates of ~ 60%. This means for each dollar they make they lose 1.22. Their Profit Factor is ~ 0.82.
4 lose 6 wins each win is $30 each lose is $55 ==> Profits = 180 Losses = 220.
So this explains why the average loses. But not every one makes those mistakes. And someone might learn from them, or even just flip a coin. Why do so few cut it? Simply "emotions" and never learning and all the things "trading educators" throw at us? Come on, apart from the very worst, if someone gets hit enough times he will learn his lesson and want to do the opposite. And we know there are plenty that blow up and keep coming back, regardless of negative results. Why is it as high as 90%?
What more could there be to it?
Let's look at this data that was provided.
We can see the GBPUSD ATR was around 80 pips.
FXCM Data: 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.
Losers are 1 ATR (they hold for the whole day / 24 hours on average), Winners are half an ATR (held for half a day on average)
We can see the EURUSD ATR was around 100 pips.
FXCM Data: 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.
So about the same as GBPUSD, the average losers is around 1 day, the average winner half that.
Spreads are at least 1 pt and 0.01%, I think they were not much higher back then. On some pairs (that they trade on the same time horizons), spreads go up to 0.05% - for a similar ATR.
For gold spread is 0.03% but the ATR is a bit higher.
So typically, if we bring everything to 1% ATR, the spread is around 0.025%.
Let's say we have a daytrader, he has no edge, positive or negative, so his expectancy is to breakeven.
He has a small account and doesn't want to be here for the rest of his life grinding, so he uses 10 leverage.
We ignore the fact that using leverage reduces his expectancy.
He takes 4 trades a day. This is far below what most "day trading educators" do.
In a period of 3 months he has taken (around 65 days) 260 day trades with a breakeven strategy.
0.9975^^260 = 52%. So he lost 48%.
For info:
The problem is not spreads and commissions, they are fine...
Alot of day trading educators go for stocks, with spreads of 1%. And commissions of $10 (5+5) on their 10,000 orders (0.1%). They are using more zero comissions now, but they pay it in slippage, just worse fills generally, and bigger spreads.
Educators take like 20+ trades a day (on their demo accounts). At a gentle, over optimistic 0.25% loss on every trade to fees, in 2 months (45 days) with 20 trades a day this is what happens: 0.9975^900 = 0.10. Down 90%.
Or did they find the holy grail that gives them a big expectancy to counter the cost AND a ton of setups at the same time AND they take a ton of trades a day so clearly they aren't doing massive research each time?
Usually even if you can get a good expectancy then you will get less setups. The better the profit factor (winrate and risk reward), the lower the number of opportunities.
So they have the absolute holy grail. A large expectancy. They get a ton of signals. And little effort since they can at most spend a few minutes analysing to get this golden setup. So we could call it easy and no brain.
Hmmm, an easy no brain super expectancy strategy, that fires signals every few minutes... Ye sure. And it keeps working, no one found it.
And they are teaching this to every one for a few hundred or thousand bucks. THE holy grail.
Yep, sure, why not. Seems totally legit. XD
What if you were to take 1 trade a day, stop and target 0.50%, with 53% winrate, that's a winning strat: 53 wins 47 losses. 10 leverage. Spreads of 0.02%. 100 trades in 4 months.
(0.998^100)*(1.05^53)*(0.95^47) = 0.975. Lost 2.5% on a winning strat. MORE MORE MOAR. To go faster. Only thing that will go faster is you'll lose money faster.
With 52% winrate.
(0.998^100)*(1.05^52)*(0.95^48) = 0.88.
Can quickly go wrong... A difference of 1 winner becoming a loser ruins it.
If you are curious, my own average loser, it varies alot so I don't know for sure, but 40 points is typical, so same as their average winner.
Average winner is 200 :) About 2 daily ATR is what I get on average on winners. A little over 1 to a little over 3.
I would like to have bigger winners, and spend more time analysing fewer currencies or commodities, focus more on babysitting winning trades than exhausting myself looking and looking and searching, my goal if possible is to increase my time horizons.
But anyway, spreads and losers are just small costs that stack up, but winners pay for that, and spreads don't reduce my winners by 10%.
You might think "hey in prop firms they day trade alot"
Well here is my answer:
A) They are using big money to make money. They are not making 500% on 50k accounts. More like 1 to 20% on hundreds of millions. If you start small and want to grow this does not help.
B) They have alot of advantages they pay for (faster connection to exchange, they can negociate costs, prime brokerage, top research/info, etc).
C) They are going down under ALL THE TIME.
D) Most famous funds with best returns are quants, long term investing, swing/position trading hedge funds. Not day trading prop firms.
E) You ever seen a prop trader results? $50,000 net profit. Wooo nice. Gains: 800,000. Losses: 550,000. Commissions & fees: 200,000. Bleuarg. Not counting other costs...
Solution
==>
1- Bigger winners. Small winners means that 10% or even more of it can vanish to fees. The bigger, the less impact fees will have on it.
2- Look more for high quality, high odds setups, spend time being a detective doing your research, and then be a sniper 1 bullet 1 kill, not some pleb holding a machine gun over his head and firing at random.
3- Gains won't "compound faster" by reducing time frame. Losses will. Haven't heard of any famous trader that was buying and selling every few hours. Pick a timeframe high enough so that you have time to study setups, get high quality ones once in a while, and spreads don't make much of a difference. You can't grow faster by going in bigger, or more often. Simple maths. Only thing that will improve results, is... tada! Improving.
Less is more.
4 lose 6 wins each win is $30 each lose is $55 ==> Profits = 180 Losses = 220.
So this explains why the average loses. But not every one makes those mistakes. And someone might learn from them, or even just flip a coin. Why do so few cut it? Simply "emotions" and never learning and all the things "trading educators" throw at us? Come on, apart from the very worst, if someone gets hit enough times he will learn his lesson and want to do the opposite. And we know there are plenty that blow up and keep coming back, regardless of negative results. Why is it as high as 90%?
What more could there be to it?
Let's look at this data that was provided.
We can see the GBPUSD ATR was around 80 pips.
FXCM Data: 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.
Losers are 1 ATR (they hold for the whole day / 24 hours on average), Winners are half an ATR (held for half a day on average)
We can see the EURUSD ATR was around 100 pips.
FXCM Data: 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.
So about the same as GBPUSD, the average losers is around 1 day, the average winner half that.
Spreads are at least 1 pt and 0.01%, I think they were not much higher back then. On some pairs (that they trade on the same time horizons), spreads go up to 0.05% - for a similar ATR.
For gold spread is 0.03% but the ATR is a bit higher.
So typically, if we bring everything to 1% ATR, the spread is around 0.025%.
Let's say we have a daytrader, he has no edge, positive or negative, so his expectancy is to breakeven.
He has a small account and doesn't want to be here for the rest of his life grinding, so he uses 10 leverage.
We ignore the fact that using leverage reduces his expectancy.
He takes 4 trades a day. This is far below what most "day trading educators" do.
In a period of 3 months he has taken (around 65 days) 260 day trades with a breakeven strategy.
0.9975^^260 = 52%. So he lost 48%.
For info:
The problem is not spreads and commissions, they are fine...
Alot of day trading educators go for stocks, with spreads of 1%. And commissions of $10 (5+5) on their 10,000 orders (0.1%). They are using more zero comissions now, but they pay it in slippage, just worse fills generally, and bigger spreads.
Educators take like 20+ trades a day (on their demo accounts). At a gentle, over optimistic 0.25% loss on every trade to fees, in 2 months (45 days) with 20 trades a day this is what happens: 0.9975^900 = 0.10. Down 90%.
Or did they find the holy grail that gives them a big expectancy to counter the cost AND a ton of setups at the same time AND they take a ton of trades a day so clearly they aren't doing massive research each time?
Usually even if you can get a good expectancy then you will get less setups. The better the profit factor (winrate and risk reward), the lower the number of opportunities.
So they have the absolute holy grail. A large expectancy. They get a ton of signals. And little effort since they can at most spend a few minutes analysing to get this golden setup. So we could call it easy and no brain.
Hmmm, an easy no brain super expectancy strategy, that fires signals every few minutes... Ye sure. And it keeps working, no one found it.
And they are teaching this to every one for a few hundred or thousand bucks. THE holy grail.
Yep, sure, why not. Seems totally legit. XD
What if you were to take 1 trade a day, stop and target 0.50%, with 53% winrate, that's a winning strat: 53 wins 47 losses. 10 leverage. Spreads of 0.02%. 100 trades in 4 months.
(0.998^100)*(1.05^53)*(0.95^47) = 0.975. Lost 2.5% on a winning strat. MORE MORE MOAR. To go faster. Only thing that will go faster is you'll lose money faster.
With 52% winrate.
(0.998^100)*(1.05^52)*(0.95^48) = 0.88.
Can quickly go wrong... A difference of 1 winner becoming a loser ruins it.
If you are curious, my own average loser, it varies alot so I don't know for sure, but 40 points is typical, so same as their average winner.
Average winner is 200 :) About 2 daily ATR is what I get on average on winners. A little over 1 to a little over 3.
I would like to have bigger winners, and spend more time analysing fewer currencies or commodities, focus more on babysitting winning trades than exhausting myself looking and looking and searching, my goal if possible is to increase my time horizons.
But anyway, spreads and losers are just small costs that stack up, but winners pay for that, and spreads don't reduce my winners by 10%.
You might think "hey in prop firms they day trade alot"
Well here is my answer:
A) They are using big money to make money. They are not making 500% on 50k accounts. More like 1 to 20% on hundreds of millions. If you start small and want to grow this does not help.
B) They have alot of advantages they pay for (faster connection to exchange, they can negociate costs, prime brokerage, top research/info, etc).
C) They are going down under ALL THE TIME.
D) Most famous funds with best returns are quants, long term investing, swing/position trading hedge funds. Not day trading prop firms.
E) You ever seen a prop trader results? $50,000 net profit. Wooo nice. Gains: 800,000. Losses: 550,000. Commissions & fees: 200,000. Bleuarg. Not counting other costs...
Solution
==>
1- Bigger winners. Small winners means that 10% or even more of it can vanish to fees. The bigger, the less impact fees will have on it.
2- Look more for high quality, high odds setups, spend time being a detective doing your research, and then be a sniper 1 bullet 1 kill, not some pleb holding a machine gun over his head and firing at random.
3- Gains won't "compound faster" by reducing time frame. Losses will. Haven't heard of any famous trader that was buying and selling every few hours. Pick a timeframe high enough so that you have time to study setups, get high quality ones once in a while, and spreads don't make much of a difference. You can't grow faster by going in bigger, or more often. Simple maths. Only thing that will improve results, is... tada! Improving.
Less is more.