Why does the Average Forex Trading Strategy Lose Money In Their Investment?

Both anecdotally and empirically, we have seen that many new forex traders are unable to profit due to poor money management techniques. Many speculators come from other traded markets, and their technical and fundamental analysis skills are quite good. Yet the most common reason for failure comes down to one simple point: poor money management. The most successful traders do not necessarily have an analytical edge. Many unprofitable traders have excellent analytic and forecasting skills, but going from analysis to live trades is often a limiting factor.

What is good money management? Letting your profits run and cutting your losses short. A countless number of trading books advise traders to do exactly this. In theory, this is a simple exercise: make profit targets larger than maximum loss thresholds. In practice, however, we see clear evidence that most traders do a poor job of putting these strategies in to action.

Measuring the Cold Hard Facts about Forex Trading

Using our execution desk data, we can examine general tendencies across a wide range of forex traders. Our data is completely anonymous, and we cannot identify any individual trader. Yet it is still useful to look at common themes across a broad swath of forex traders. A quick look at the histogram above tells us several different important facts about tendencies in trader profits and losses. One of the most immediately visible facts about daily P/L changes is that the overall distribution is skewed towards sizeable losses. That is to say, there are a greater number of days in which traders post unusually large losses than similarly large gains. The maximum single-day average gain was approximately 130 pips, while the worst single-day loss was a substantial 180 point drop.

Such a fact overshadows that traders actually turned a profit on an impressive 54 percent of all trading days in our three-year sample period. Despite generating gains on most days, the average trader lost money because of particularly sizeable losses on individual days of trading.

What do successful and unsuccessful trading strategies look like?

We can classify traders into many different groups, but it is useful to go through two simple examples of successful and unsuccessful trading strategies in recent market conditions. Using two very simple strategies we can identify some of the pitfalls across forex markets today.

The first trader often boasts that he is profitable in almost 60 percent of all trades—rarely taking a loss. Unfortunately, his style leaves him exposed to outsized losses when he least expects it. In fact, his max single-trade loss in more than four times his maximum gain—exposing clear flaws in his money management techniques. Given that his average winner generates 90 pips in gains, that 1620 point loss erases his winnings from 18 successful trades.