Why do 95% of retail traders lose?

Imo backtesting doesnt work because the past cannot be used to predict the future, market behaviour changes all the time, they are more dynamic than most people think.

 

You don't have to know whether a setup will succeed or fail. All you have to know is the average statistical likelihood of success or failure as demonstrated over time, and then define levels at which stops and targets are likely to work to your advantage.

For example, if I've back-tested breakout price action in a given trading instrument of highs/lows of the day in a defined trend and discovered that 60% of the time a breakout runs more than .20 before retracing more than .10 from the breakout level, and 40% of the time a breakout fails to run at least .20 before retracing more than .10 from the breakout level, I have a tradeable edge with key risk management data included.

I don't have to know whether any individual breakout will succeed or fail. I only have to be sure to trade all of them as long as the setup is valid (in this case, price must be trending, not ranging).

If an average week offers 10 breakout opportunities and I trade every breakout opportunity with an .11 stop loss and a .20 profit target, I average a gross profit of .76 per lot per week.

An edge in trading isn't restricted exclusively to those who have inside information, or the ability to manipulate the market, or to HFT's who try to front run for fractions of cents.

 

Then you need to look a little closer and find those patterns that work more often than not and have done so for years through bull and bear.

The only adjustments I've had to make in the time I've been trading specific "edges" over and over, are adjustments to stops and targets when price moves into higher or lower ranges.

As AAPL stock climbed into higher price ranges, I widened my stops and profit targets proportionally; same with CL (crude oil futures). That doesn't affect my profitability nor the setups I trade.

They still work exactly the same as they've been working through bull moves and bear moves. And from any chart I look at in any time frame going back 10 years, I see the certain patterns again and again working more often than not.

There are reasons for this based on human nature inherent in the majority, which, in case you haven't noticed, has proven impossible to change throughout recorded history.

YOU CAN'T ENSURE CERTAINTY IN TRADING.

 

Amateur backtesting endlessly tried by ET members doesn't work because the input is insufficient and for example 'divide and conquer' sorting of the data has not been carried out first.

Amusing irrationality because the only thing we do have is the past. As you look at the live screen of prices on any chart it is ALL the past - all of it - except the instant moment of the next price. The past therefore has to be used and it is very effective as we follow price on the screen, signalling as it will, where price is going next.

 

I think that one of the problems is that some people think that something which works 60% of the time during a specified time period will then suddenly work 0% of the time. My experience has been that it's more like sometimes it will work 63% of the time and other times it will work 57% of the time. Then it will work 65% of the time for a while, then 55%. I agree that if it's based on something real it won't just completely stop working.

 

This is about the 100th time I have seen this topic. So, I finally decided to finally toss in my two cents.

We all agree traders lose money because they don’t know what they are doing. Here is how it happens to most newbie traders:

The majority of newbie traders start out by reading countless trading books, magazines, paying for expensive trading lessons, conventions and courses and/or trying techniques derived from the internet. These materials stress trading special setups that promise the world to us. However, few if any of us can take on these special sets-ups (specially designed by another trader) directly from these sources and trade them profitably over any length of time, if at all.

The reason we cannot trade most special setups is they lack giving us 2 essential items we desperately need – experience and constraints. You read “…only trade the ES it’s the easiest to trade… just use this setup…” The 95% of us that try to trade this set up do not have the experience to know when it may work or when it may not work (the author left those details out). This lack of “experience” with most set ups leads us to abandon the set up at the 3rd consecutive loss it takes (the teacher forgot to tell us 5 consecutive losses is the normal drawdown).

In the few times we try to trade the special set up we had no idea what realistic constraints to put in our plan to trade the set up. If you were to ask these authors and teachers directly most of them would give you a set of constraints to put in your plan that are totally unacceptable to you. Such as “ …Why are you trading with $10,000?…this setup has drawdowns bigger than that trading 1 contract!.. You need $25,000 minimum in your account (which they neglected to tell you)…” “…Why are you doing position sizing that way? This special set up only works with ---- position sizing (which they neglected to tell you)…What, you didn’t know that after an 6% drawdown in month you must stop all trading? (the teacher left their key rule out and your account is down 32% in 20 days)”

The next layer that is piled on top for a newbie trader in trying to adjust this special set up using forum advice to make it work. “…I read that author. Don’t trade ES try the special setup with CL it will work.” “The authors time interval doesn’t work …I trade 734 Ticks with the special set up and it works for me!...” “You have got it all wrong you have to back test that special set up into an strategy with a minimum of 10 years of data.” “Another states back testing is a waste of time it never works…”

By the time most newbies try to adjust to all these fluctuations to try to trade this special setup or another special set up they have burned through one maybe two trading accounts and 95% give up (…some will try again…). The 1 in 20 who is still live with the special set up hit a huge random winning streak (…this is the one who writes the author or teacher and tells them their whole life has changed because of the huge profits the special set up has made for them…).

A select few passionate traders having been consumed by this juggernaut that has crushed them to pulp start over. This time they realize they must build trading from the ground up using set ups and rules that are right for them. What all successful traders eventually find out is that their trading is a form of artificial intelligence. In this process each trader develops a rules based expert system that works from our experience to specifically to manage our trading criteria or edge. These traders find that the rules that work for you as trader in the majority of the cases will not work for me and my trading edge.

 

I agree with you. Back testing is a waste of time for your edge. My guess is many traders here support you a 100%.

However, back testing is a key part of my trading. I would not be retired without it as part of my edge.

Where is it written in trading we can’t do things different and still be successful? WalMarts business plan is not like Waste Management but both make a profit? So why can’t we as traders do it differently but still accomplish our goals and objectives?

 

No tested reliable Plan that makes money and no Discipline is why 99% fail. Simple as that.

 

1) Having a specific risk vs reward for a trade.

2) Not moving stops or targets unless price tells you something new.

3) Revenge trading or over trading can be a killer.

4) Not understanding statistical probability theory. Note: I got an A+ in college in statistics and advanced statistics.

For example, you could have a trade that works 70% of the time, and still have 4 losses in a row. You could have a trade that works 50% of the time, and have 10 winners in a row.

5) Many talk about having an edge, but 90% of trading has nothing to do with an edge. You can only win 50% of the time or less and still be profitable, while those that win 95% of the time could lose all their money. This is the truth not a theory and I have seen it happen.

 

Stops are too tight. Less than 10% can afford to take a loss.