Out of all traders trying to make a living trading forex, only 8 to 10 % will succeed. The rest will fail. This are the ruthless statistics that can be found you on any broker website. On the brighter side, this number may grow a little. The thing is, some of the traders, who failed the first time, may try to conquer the forex market again. If they succeed, the stats will improve.
In this post, we’ll find out how to calculate the percent of profitable trades and why we need to know this parameter in the first place.
Suppose, Broker A has 5% of successful traders. By Broker B, this number reaches 8%. Broker C boasts even more impressive stats, with 10% of lucky traders. As you can see, the situation is a little more complicated, since the “success stats” may vary across brokers.
Does it mean there is no way to find out how many forex traders succeed? Luckily, there is more than one method to determine their number. Nassim Nicholas Taleb, an acclaimed economist and trader, has designed his own method to calculate the percent of successful traders based on how long they’ve been trading.
How to use the Taleb method
Suppose, we have trading stats on one forex trader, who has been trading for 1 year. There is a 50% chance that the trader’s deposit will either grow or diminish.
What do these data tell us? Out of 10,000 traders, only 313 will still be trading in 5 years. This means that only 3% of newcomers will make it in the forex market.
By using this method, you can easily find out the number of successful traders by the end of several months or one year.
Why is success so rare?
The forex market is a harsh and hard-to-predict environment. Traders, who have managed to turn trading into a source of consistent income, are very few. It’s not uncommon that two traders with the same level of skills can perform differently under the same circumstances.
The thing all successful traders have in common is the ability to push the boundaries and think outside the box. This quality helps them a lot in making accurate predictions and forecasts.
Furthermore, smart traders know how to manage their capital and risks. Sometimes, this makes all the difference between success and failure. If a trader neglects the fundamentals of money management, chances are that they will blow away their bankroll in the blink of an eye.
Beginning traders make the common mistake of underestimating the importance of money and risk management. They erroneously believe that a successful trader is the one that enjoys an endless series of winning trades.
The truth is quite different. For the most part, the number of winning and losing trades is about the same. It’s wise capital management that allows clever traders to be in the black.
Let’s take an example. A trader opens 10 trades. Five trades closed with a loss. The other five trades generated a profit. At first sight, it seems that the trader’s profits must equal to their losses. However, there is one important factor at play. Our trader uses a 1:3 risk/profit ratio.
Let’s switch to pips. If the trader risks 20 pips, their target profit must be set at 60 pips. After 10 trades, the trader lost 100 pips while earning 150 pips.
This is a simple example that makes things clear. Although the number of winning and losing trades is the same, the trader ended up with a profit. This is the power of money management in action.
In trading, success is a mix of different factors. To make a living trading forex, you need to be good at many things, from making accurate predictions, to following money management rules, to controlling your emotions. Knowing this, every trader can break the vicious circle and start making money in the forex market.