Why Many Traders Lose Their Profits Soon After Winning

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Why Many Traders Lose Their Profits Soon After Winning

A common scenario experienced by many traders is suffering losses right after having struggled to make gains. Does this ring a bell?

You follow your technical analysis and enter a trade at the right time and win. Then you enter again and win another one, and maybe even another one. It feels like you are well on your way to make some serious gains when all of a sudden you lose quickly and you lose big.

You start scratching your head how did that happen so quickly and where it went all wrong for you. This article will examine why many traders, novice as well as professional, tend to lose their winnings so quickly and easily.

The psychology of winning and the Recency Effect

As many of you already know trading is not only knowing your technical and/or fundamental analysis. It is also psychology. Many will argue that the psychology and the state of mind of a trader is actually more important than any other aspect of trading. Understanding how our brain functions and makes decisions is a crucial element that needs to be addressed.

Psychology tells us that there is a thing called the Recency Effect, a state in which people tend to assign more value to the most recent events and experiences, as opposed to those experiences that happened long ago.

Taking the Recency Effect into account a trader who who has just experienced a big win or a nice streak of wins is much more likely to remember that experience and believe in similar outcome.

Main reason for losing is trader’s overconfidence

The problem with the recency effect is that it plays a dirty trick on the mind and makes the trader lose focus and objective reasoning. Many traders hyped by the recent wins and the recency effect and influenced by the increased levels of dopamine (Read The Worst and the Best Times To Trade Binary Options for more information) are very likely to follow up with the wrong moves and possibly lose their winnings, if not more. This happens to traders very often.

Main reason for losing after having won a few trades is trader’s overconfidence. Overconfidence can destroy any trader without the skills and the know-how to recognize and control it. Overconfidence can make you believe many things which may not necessarily be true.

Defined by psychologists, overconfidence effect is a strong bias in which subjective confidence in your own perception of a situation is greater than the objective accuracy of that perception.

In simple terms overconfidence effect can distort the traders view of what is really happening, and more importantly, it can lead to bold actions that can turn out quite badly. General studies have shown that the margin error of an overconfident subject is about 20%.

When feelings of overconfidence run through your head when you’re trading it’s a sure sign to stop. A good idea is to look at your trading plan again at this point to refocus your attention.

Virtual money is much easier to part with

When you have $200 in your pocket and you lose it, psychologically it feel more painful that if you lost $200 of virtual money. The reason is that tangible items make a greater impression when they are lost than virtual items that we never touched or used.

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Trading profits are always virtual at first, they simply appear as additional numbers in your account. Until your profits are cashed in, they are virtual. Since these virtual profits are intangible, traders are more likely to risk them than if that money was in their pockets.

As a solution, a good advice for traders is to transfer and cash in some of the winnings regularly.

This will keep your ‘head in the game’ because you will need to preserve your baseline trading capital and make new profits. In addition, if you cash in your winnings you will also have a tangible connection to your trading practice in the form of cash.


Without a doubt losing your trading profits can be painful to any trader. The whole experience can be even more frustrating when the profits are lost quickly and recklessly. The situation can be often times avoided by sticking to the trading plan with each trade. Overconfidence is the main cause of errors that lead to losses so try to be aware of your emotional and state of mind at the time of trading. Of course it’s easier said than done but then who said trading was easy.

Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics


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Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics

“95% of all traders fail” is the most commonly used trading related statistic around the internet. But no research paper exists that proves this number right. Research even suggests that the actual figure is much, much higher. In the following article we’ll show you 24 very surprising statistics economic scientists discovered by analyzing actual broker data and the performance of traders. Some explain very well why most traders lose money.

  1. 80% of all day traders quit within the first two years. 1
  2. Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. 1
  3. Traders sell winners at a 50% higher rate than losers. 60% of sales are winners, while 40% of sales are losers. 2
  4. The average individual investor underperforms a market index by 1.5% per year. Active traders underperform by 6.5% annually. 3
  5. Day traders with strong past performance go on to earn strong returns in the future. Though only about 1% of all day traders are able to predictably profit net of fees. 1
  6. Traders with up to a 10 years negative track record continue to trade. This suggests that day traders even continue to trade when they receive a negative signal regarding their ability. 1
  7. Profitable day traders make up a small proportion of all traders – 1.6% in the average year. However, these day traders are very active – accounting for 12% of all day trading activity. 1
  8. Among all traders, profitable traders increase their trading more than unprofitable day traders. 1
  9. Poor individuals tend to spend a greater proportion of their income on lottery purchases and their demand for lottery increases with a decline in their income. 4
  10. Investors with a large differential between their existing economic conditions and their aspiration levels hold riskier stocks in their portfolios. 4
  11. Men trade more than women. And unmarried men trade more than married men. 5
  12. Poor, young men, who live in urban areas and belong to specific minority groups invest more in stocks with lottery-type features. 5
  13. Within each income group, gamblers underperform non-gamblers. 4
  14. Investors tend to sell winning investments while holding on to their losing investments. 6
  15. Trading in Taiwan dropped by about 25% when a lottery was introduced in April 2002. 7
  16. During periods with unusually large lottery jackpot, individual investor trading declines. 8
  17. Investors are more likely to repurchase a stock that they previously sold for a profit than one previously sold for a loss. 9
  18. An increase in search frequency [in a specific instrument] predicts higher returns in the following two weeks. 10
  19. Individual investors trade more actively when their most recent trades were successful. 11
  20. Traders don’t learn about trading. “Trading to learn” is no more rational or profitable than playing roulette to learn for the individual investor. 1
  21. The average day trader loses money by a considerable margin after adjusting for transaction costs.
  22. [In Taiwan] the losses of individual investors are about 2% of GDP.
  23. Investors overweight stocks in the industry in which they are employed.
  24. Traders with a high-IQ tend to hold more mutual funds and larger number of stocks. Therefore, benefit more from diversification effects.

Conclusion: Why Most Traders Lose Money Is Not Surprising Anymore

After going over these 24 statistics it’s very obvious to tell why traders fail. More often than not trading decisionsВ are not based on sound research or tested trading methods, but on emotions, the need for entertainmentВ and the hope to make a million dollars in your underwear.В What traders always forget is that trading is a profession and requires skills that need to be developed over years. Therefore,В be mindful about your trading decisions and the view you have on trading. Don’t expect to be a millionaire by the end of the year, but keep in mind the possibilities trading online has.


– 1 Barber, Lee, Odean (2020): Do Day Traders Rationally Learn About Their Ability?
– 2 Odean (1998): Volume, volatility, price, and profit when all traders are above average
– 3 Barber, & Odean (2000): Trading is hazardous to your wealth: The common stock investment performance of individual investors
– 4 Kumar: Who Gambles In The Stock Market?
– 5 Barber, Odean (2001): Boys will be boys: Gender, overconfidence, and common stock investment
– 6 Calvet, L. E., Campbell, J., & Sodini P. (2009). Fight or flight? Portfolio rebalancing by individual investors.
– 7 Barber, B. M., Lee, Y., Liu, Y., & Odean, T. (2009). Just how much do individual investors lose by trading?
– 8 Gao, X., & Lin, T. (2020). Do individual investors trade stocks as gambling? Evidence from repeated natural experiments
– 9 Strahilevitz, M., Odean, T., & Barber, B. (2020). Once burned, twice shy: How naГЇve learning, counterfactuals, and regret affect the repurchase of stocks previously sol.
– 10 Da, Z., Engelberg, J., & Gao, P. (2020). In search of attention
– 11 De, S., Gondhi, N. R. & Pochiraju, B. (2020). Does sign matter more than size? An investigation into the source of investor overconfidence

Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake

W hy do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker’s trading platforms. In this article , we look at the biggest mistake that forex traders make, and a way to trade appropriately .

Why Does the Average Forex Trader Lose Money?

The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult.

We looked at over 43 million real trades placed on a major FX broker’s trading servers from Q2, 2020 – Q1, 2020 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain.

Percent of All Trades Closed Out at a Gain and Loss per Currency Pair

Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2020 to 3/31/2020.

The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2020 through Q1, 2020 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time.

If traders were right more than half of the time, why did most lose money?

Average Profit/Loss per Winning and Losing Trades per Currency Pair

Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2020 to 3/31/2020.

The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades .

Let’s use EUR/USD as an example. 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. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. 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.

What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution.

Cut Losses, Let Profits Run – Why is this So Difficult to Do?

In our study we saw that traders were very good at identifying profitable trading opportunities–closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run.

When your trade goes against you, close it out . Take the small loss and then try again later , if appropriate. It is better to take a small loss early than a big loss later.

If a trade is in your favor, let it run . It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains.

But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology.

A Simple Wager – Understanding Human Behavior Towards Winning and Losing

What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?

50% chance to Win 1000

50% chance to Win 0

Expect to win $500 over time

Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.

50% chance to Lose 1000

50% chance to Lose 0

Expect to lose $500 over time

In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time.

Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why?

Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory

Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards.

The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains .

It feels “good enough” to make $450 versus $500 , but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around.

This doesn’t make any sense from a trading perspective—50 0 dollars lost are equivalent to 50 0 dollars gained; one is not worth more than the other. Why should we then act so differently?

Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure

Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success.

Avoid the Common Pitfall

Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely?

When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book.

Typically, this is called a “ reward/risk ratio ”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio.

If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades.

What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio . That way, if you are right only half the time, you will at least break even.

Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series.

Stick to Your Plan: Use Stops and Limits

Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning .

This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor).

Managing your risk in this way is a part of what many traders call “ money management ” . Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading.

Does Using 1:1 Reward to Risk Really Work?

Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it.

Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent.

Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference.

Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2020 to 3/31/2020.

Game Plan: What Strategy Can I Use?

Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher

Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account.

The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away.

We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders.

*Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2020 to 3/31/2020.

Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide , we help you identify your trading style and create your own trading plan.

View the next articles in the Traits of Successful Series:

Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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