Daily Archives: February 23, 2012

A while back I wrote the blog post Be Careful Trading Against the Masses. In it I talked about how much trouble one can get into thinking that the bulk of retail traders are generally wrong and thus that you should trade against that collective. I can't blame people for that attitude as it's been put forth among market participants for decades. The problem is the masses aren't as wrong as you might think – at least in the short term.

Tuesday on CNBC there was a representative of FXCM on the broadcast and one of the things he talked about was research they did looking at their customer accounts. He put up three pairs on the screen showing the win% of FXCM account-holders for trades done in each of those pairs. The best one was AUD/NZD which was above 70%. Granted, that's not a pair a lot of people trade, so the data might be a bit less significant than others, but even EUR/USD was in the 60% area. In other words, retail traders get it right more often than not, so you don't just want to fade them.

Winning often, but losing money
Now here's the rub. These same traders are losing money because their winners are much smaller than their losers. The FXCM guy actually showed the comparison. It was a very direct indication of the old wisdom that losses need to be cut short and/or winners allowed to run. Even academics have come to realize that the human inclination is to do the exact opposite. We are risk averse, so we tend to book profits too quickly for fear of losing them while holding losers in hopes they come back.

These figures also back up comments I've made in the past (such as in Why You Shouldn’t Fixate on Winning Percentage in Your Trading) about how win% gets too much focus. If 60% of EUR/USD trades done by the FXCM customer community are winners, but the losing trades are something like twice as big as the winning ones then what's the outcome? That's right. It's a net loss.

Sometimes it's worth trying to increase Win%. For most developing traders, though, it's the size of the losers relative to the winners that are the more important consideration in need of addressing.

Don't let the marketers get you

The warning here is also that we shouldn't allow ourselves to get sucked in by marketing which promotes a high win% for some trading system or trader. If you don't have the other side the expectancy equation – namely winner/loser ratio – then you don't have all the information (you'll notice Currensee includes both sets of figures in the Trade Leader data sheets).