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Trader performance statistics


In this blog post we will look at some interesting statistics
on the profitability of traders.

Over the years, scientific studies have been conducted on the
profitability of speculative trading and investment accounts.
We will go over the findings of Steward (1949), Houthakker (1957),
Rockwell (1967), Ross (1975), Chang and Stevenson (1985),
Hartzmark (1987), Leuthold, Garcia, and Lu (1994).

These studies have pointed out the common failure
to make money consistently in speculative accounts.
It is estimated that every year 75% of
all investors and traders lose money consistently.
If we look at longer periods of time, that number increases to
an estimated 90% of investors and traders.

So what is generating these startling financial losses?

The 2 main factors generating losses in speculative accounts are:
1) overtrading
2) sloppy risk management.

Overtrading leads to a steep accumulation of brokerage commissions,
as well as the enhanced negative effects of slippage,
both of which grind out the account over time.

Sloppy risk management, risking more than 3% on any individual trade,
will practically guarantee ruin, as eventually
a series of consecutive losses will materialize and cripple the account.

% drawdown    % gain required to recover losses
10%               11.1%
20%               25%
30%               42.8%
40%               66.6%
50%               100%

Any account that has suffered severe losses, has to overcome
the powerful negative compounding effects that are now working against achieving profitability.

What else?

Well, let's dig a little deeper into the profiles of different investors/ traders.
Expert trading coaches like Mark Douglas and others have done extensive work in this field.

They have revealed that the majority of traders/investors,
around 55-70%, do make money, even large amounts of money for a while,
and then amazingly they lose it all again. Their equity curve goes up and down,
up and down, in a steady repetitive cycle.
The end result of each cycle tends to be always the same: a reduced net total equity balance.

Another 25-30%, rather than experiencing cycles of gains and losses,
are simply consistent losers. Their equity curve looks like a consistent
downward slope with lower tops and lower bottoms along the way.

Any good news?

Yes.

There exists a small group of successful traders/investors,
around 5-10%, who are the rare consistent winners. They are able
to generate profits consistently over time for themselves and their clients.
The losses they do incur on occasion tend to be small and are easy to recover from.

These are the top traders/money managers
that you want to have looking out for your money - or
you can work hard at becoming proficient yourself.

 

Futures trading involves substantial risk and may not be suitable for everyone.
Past performance is not necessarily indicative of future results.



Disclosure: no positions