Dear John. Thank you very much for your services, – you are doing a great job! The reason that I am writing you right now is that I am desperate to loosing a half of my modest $2000 option trading account after my subscription of one of the options gurus, JC. I did trust them and I lost. Those people have so much money that they do not care how much one can loose in a trade. Anyway, I need at list to restore my account to the starting point and I am looking for some advice what should I do?

First of all, let me address the comment about the guru not caring about how much one can lose. I don’t know who this guru is or anything about their service. Assuming they are legit and worthwhile (and even if they aren’t), I would suggest that risk management is the responsibility of the trader doing the trading. While the guru may offer up suggestions about where to put stops or otherwise limit the losses on a given position, they cannot (and should not be expected to) tell you how big to trade, or indeed whether you should even be doing a given trade. They simply do not have the proper information. That is your responsibility as a trader to sort out for yourself.

In this particular instance, I can’t help but wonder if the trader in question was simply not financially capable of following the trades of this particular guru. It may be the case where the guru has several positions on at a given time, expecting the odds to work in their favor by maximizing the opportunities for them to do so. If a trader is not sufficiently capitalized to do the same, they risk not matching the guru’s performance because they are trying to cherry pick.

As for making the account whole again, I would tell a trader in this situation to put that out of their mind. Either add more funds to the account or reset your mental state to the current account balance (which really should be done on a continuous basis anyway). DO NOT attempt to quickly make the money back. That’s a recipe for disaster. Take a systematic approach to build the account back up based on a clear trading plan, assuming you have one.

Let me pick on one particular comment:

NFA has gone a long way trying to completely kick retail forex out of the US eventually reducing the number of retail forex brokers from several dozens to just 11. With FX Solutions heading out as well the number of US forex brokers may fall below 10 within few months.

There’s no doubt we have fewer US forex brokers now. Is that a function of NFA/CFTC regulations? In some cases, I’m sure it is – especially when we talk about minimum capitalization rules that were put into place. I would contend, however, that such consolidation is simply a natural product of a business that is maturing.

Think about what we’ve seen in retail forex in the last decade or so. Topping the list is the way bid/ask spreads have come down very sharply. This means less income for the brokers, most of whom operate in some fashion on a dealer-based model. To put it another way, profit margins have been squeezed considerably. Any time that sort of thing happens industry-wide you get consolidation as those companies unable to compete either go out of business or get absorbed by those who can.

I would suggest we’re likely headed for a handful of major US forex brokers. We need only look at the stock market to see how few big brokers there are in that sector despite the fact that it features a bigger customer base.

Now, this is not me disagreeing with many of the arguments against the NFA credit card ban. I actually think it’s somewhat silly in a lot of ways given the many ways customers can access and move around money. If avoiding the use of borrowed money is the main focus (and I’m largely in agreement on that) then this ban only makes it slightly harder, as others have noted.

One question I would bring up, though, is that of expenses. Who foots the bill for credit card transaction fees, which are generally in the 2%-3% range? My guess is in most, if not all, cases it is the customer paying that bill. Preventing the use of cards from that perspective automatically keeps traders out of a performance hole. This game is hard enough as is, as I observed in Starting to detail forex profitability data.

I’d still love to hear your thoughts on the credit card ban, by the way. Feel free to leave a comment below, on Facebook, or Twitter @RhodyTrader.

Here’s the thing, though. The figures actually don’t back up any “death of…” scenarios, at least from a regulatory perspective. The US brokers didn’t start reporting active trader accounts to the CFTC until Q3 2010 (with data retroactive to Q4 2009), so we don’t have good figures for the Q2 2009 period when the “no hedging” rules kicked-in, or for the quarter immediately thereafter. There is a dip in active accounts between Q4 2009 and Q1 2010, which may be attributable in some way to the subsequent 100:1 leverage restriction put in place at the end of November 2009 (see New NFA Retail Forex Leverage Restrictions), but that seems highly unlikely given that when the Commodity Futures Trading Commission (CFTC) lowered that leverage cap to 50:1 a year later (see New CFTC Rules for Retail Forex Trading) there was no noticeable impact on active accounts as we can see in this table:

Notice how the number of active US-broker accounts held quite level during the year from Q4 2010 when the lowered permissible leverage went into effect through Q3 2011 (figures derived from the quarterly reports compiled by Forex Magnates). The sharp drop in active accounts doesn’t come until Q4 2011, though there wasn’t any particular catalyst (Forex Magnates suggested the cumulative effect of increase regulation, but that seems unlikely given the sharp 1-quarter move) and the fall was across brokers.

What is really interesting to note in the table, though, is how stable the number of profitable accounts has been since about Q4 2010. It’s only twice dipped below 30k. This comes as we’ve seen persistent weakness in the number of active accounts, which could be attributable to reduced volatility in the forex market for the last year or so. We can see that in the Average True Range (ATR) reading in the weekly USD Index chart below.

Interestingly, the number of active accounts is now back down into the area it was in during late 2009 and early 2010 when volatility was also on the low end before it ramped up again as 2010 progressed, which is when we saw the jump in accounts. That may not be cause/effect, but if we see volatility rise and the active account numbers increase again we’ll know that it’s the markets (and increased competition, no doubt) which has put the US retail forex business under pressure, not regulation.

Getting back to the stable number of profitable accounts, though, we’ve got indications of survivorship in them. That means profitable traders are staying active (though as I noted a couple weeks ago, there is considerable turnover in the accounts making money each quarter) and unprofitable ones are dropping out, which is what you’d expect to see in any case. It’s just that these days we’re not seeing an influx of new accounts to replace the dropouts.

The quarterly profitability figures reported to the CFTC by the US forex brokers are meant to provide a degree of transparency to prospective (and current) traders. As I noted before, however, they are extremely limited and don’t really do a good job of telling the story of trader profitability. They may, in fact, provide a distorted view of reality to those who don’t understand them properly. I previously looked at the rate at which profitable quarters were seen coming back-to-back – the degree of consistency in performance. To put it briefly, there isn’t much.

The data I used in that analysis was based on active brokerage accounts, just as the CFTC-reported data is also based on active accounts (defined as those doing at least 1 trade in a given quarter). Here’s the thing, though. Some traders have multiple accounts. This is not the majority of traders by any stretch of the imagination, but to the extent that these multiple accounts are active they can potentially influence the broker profitability figures.

That being the case, I re-ran my analysis using trader performance rather than account performance measurement. In the chart below I’ve differentiated the results from my data between the initial view based on accounts and the new one based on individuals, which aggregates all the accounts held by one person into a single reading.

You will notice that in all cases there is a noticeable drop between the By Accounts and By Traders figures. This tends to suggest that the best performing traders run multiple (profitable) accounts, which is interesting in and of itself. I’ll likely follow up on that tidbit later.

More importantly, though, it suggests the broker-reported figures may overstate actual trader profitability rates by at least a small degree. In my data there are nearly 5900 traders who have done trades in almost 8500 accounts. This likely represents an overstatement of how many accounts traders run, however, as sub-accounts for at least one major broker are each treated as separate accounts in my data set and are not likely done so in the CFTC-reported figures (though confirmation of that would be worthwhile). As a result, a shift from account-based metrics to trader-based metrics may not show as much of a variance as seen in my own data. Still, the broker figures do potentially overstate things a bit.

Something else to think about is the impact of copy/mirror/social trading. My data has specifically excluded it where such activity could be identified (which is a lot). I’m studying individual trader performance, after all. Those trades automatically be copied from someone else don’t really further my research. If, however, traders are having profitable trader trades copied in their accounts (which hopefully is the case if they are engaging in social trading) then this also will tend to skew the CFTC-reported profitability figures positively, overstating the performance of traders who actually make their own decisions.

While these figures profitability provide some interesting information, they are severely limited. This is something which doesn’t seem to be understood by many forex traders. The broker numbers are only a snapshot view for a 3-month period. They include anyone who has done at least a single trade (the definition of “active”), and profitable can mean a gain of $0.01. As a result, they don’t give us a lot of useful information. Most importantly, they don’t give us any idea of what % of traders are successful in the long run, because we have no idea (from the data) what fraction of the 30% are consistently profitable from quarter to quarter.

In this post I want to address the consistency point using some data I have on-hand for use in my PhD research. It comprises the trades completed by nearly 8500 accounts between January 2009 and April 2012 – a total of over 2.7 million transactions.

To facilitate reasonable comparison, I’ve produced quarterly figures from the trade data which are comparable to the broker-reported figures – namely % of active accounts profitable. Here’s how the traders in my data set stack up:

The accounts in my data come from all over the world and a large number of different brokers. In acquiring the data set I was looking for something which would be fairly representative of general individual trader activity and performance. As you can see in the table above, though, the accounts in my data have consistently shown a higher profitability % each quarter than those reported by the US brokers. This isn’t enough data to call the difference statistically significant, but I think we can safely say that the traders in my account are somewhat better than average, at least using this % profitable metric.

I make mention of the above to frame what I’m about to present.

Since consistency of performance is not something we can get from the broker-reported figures, I decided to take a look at that. This is a very basic study, but it provides some insight, I think.

Basically, I looked at each trader account to see how often a winning quarter is followed by another winning quarter. My data covers 13 full quarters.

Here are some of the notable bits from the figures:

• Out of the nearly 8500 accounts noted above, 4596 accounts (54%) had at least 1 profitable quarter somewhere along the way.
• There were 7634 total profitable account-quarters – meaning if we add up the profitable quarters for each trader and sum that all together we get 7634. If we compare that with the 20,724 quarters in which accounts did at least 1 trade we get about a 37% quarterly profitability rate, which fits in pretty well with the figures from the table above.

Now, since the question is one of consistency, I broke things down based on traders winning in back-to-back quarters. Removing accounts which only traded in Quarter 13 (thus having no back-to-back quarters) gets me down to 7933 accounts.

• A total of 4239 accounts (53%) had at least 1 winning quarter, and there were 6860 winning quarters out of 18,849 total quarters traded (36%), both about in line with the numbers above.
• Only 4381 accounts actually traded in more than 1 quarter, and of that group 2930 had at least 1 profitable quarter, which is about 67%.
• Of those with at least 1 profitable quarter, 1250 were able to have back-to-back winning quarters on at least one occasion, about 43%, producing 2211 total back-to-back winning quarters across all accounts.

In order to look further at the frequency at which back-to-back profitable quarters are seen we have to account for the fact that anyone with a first profitable quarter in a potential back-to-back as Q12 will not be counted because there is no Q14. By that I mean while the data will show a back-to-back for Q12 and Q13, it cannot show it for Q13 and Q14. As a result, while 1250 accounts had back-to-back winning quarters, thus at least 2 winning quarters overall, only 950 accounts can be evaluated in terms of going back-to-back multiple times.

• Of the 950 accounts with at least 2 winning quarters we could test for repeat back-to-back, there were 434 (46%) who had better than a 50% rate of doing so.
• There were 241 accounts (25%) with a 100% success rate in following one profitable quarter with another.
• Among the 214 testable accounts with 4+ winning quarters, 171 (80%) were successful in going back-to-back more than half the time, with 67 being 100% successful (31%).

In other words, the consistency rate is low in general terms. On average, less than half of those who make a profit in one quarter do so again in the next quarter. That means we can expect less than 15% of accounts profitable in one quarter to be so again the next, based on the broker-reported data. And seeing as the data I’m using here is from what looks to be a somewhat above average group of traders, we can probably shave a bit off even that 15%.

Furthermore, even among the 15% who are able to repeat, less than half are able to do it multiple times. That means not only is there no consistency among the profitable traders broadly, but there’s not a great deal among those who experience success – at least until you get further out into those who have a history of repeating.

This isn’t a complete analysis of the profitability figures, obviously, but it’s a start. In the future I’ll post some additional numbers to further the discussion. Comments, suggestions, and thoughts are both welcome and encouraged.

In developing the area of the document which discusses market participants I came across a telling graph. Below is a 1-year look-back at the positioning of OANDA customers in EUR/USD, which I pulled from the broker’s website.

The black line is the EUR/USD exchange rate, while the histogram shows the overall net position of all OANDA customers (blue being net long, yellow net short). In many ways this is comparable to the Commitment of Traders (COT) report, which I’ve written about in this blog on several previous occasions (see Commitment of Traders – A Weekly Report Worth Viewing as a starting point).

What I want you to make particular notice of is how often in the chart above the market is rising when traders are positioned short and falling when they are long. This supports the often-expressed view that retail traders are usually on the wrong side of the market, and suggests in general terms that they trade in a counter-trend fashion.

1. An Introduction to the Fixed Income Market
2. Most Traded Currency Pairs
3. Forex is a Scam!
4. Most Active Currency Pairs
5. My Top 5 Trading Books
6. Should I Become a Chartered Market Technician?
7. Misunderstanding the Bid/Ask Spread in Stock Trading
8. Using Unusual Options Activity to Predict Stock Moves
9. Is Trading for a Living Worthwhile?
10. No More “Hedging” for Forex Traders

As for just among the posts written in 2012, here are the top reads:

1. One Broker is so Nervous it’s Shutting Down
2. Ten of the Leading Trader Mistakes
3. What Trading Books do the Pros Read?
4. Help to Avoid Setting Your Stops to Tight
5. Has Trading Ever Made You Physically Ill?
6. Technical Analysis in Manipulated Markets
7. How to Tell if You’re Over-trading
8. Trader Looking for Angel Investors
9. If a System Works, Why Share it With the World
10. New Book Out from Market Wizards Author Jack Schwager

For those wondering why none of those on the 2012 list are on the overall list, it comes down to search engine traffic to a large degree. The older posts are well established in Google, etc. and so bring in visitors who have done searches on specific subjects. The newer posts tend to just get immediate readership at the time of their posting, and beyond to the degree that they get shared around via Facebook, Twitter, etc.

Of course my own book The Essentials of Trading is of interest to everyone.

As for other people’s writings, here’s the top 10 purchases by readers.

1. How to Make Money in Stocks by William O’Neil
2. Market Wizards by Jack Schwager
3. Hedge Fund Market Wizards by Jack Schwager (My Review)
4. Trade Your Way to Financial Freedom by Van Tharp
5. Market Sense and Nonsense by Jack Schwager
6. Mind Over Markets by James Dalton (My Review)
7. Buy and Hedge by Jay Pestrichelli and Wayne Ferbert (My Review)
8. The Daily Trading Coach by Brett Steenbarger (My Review)
9. The New Market Wizards by Jack Schwager
10. Way of the Turtle by Curtis Faith (My Review)

It is no surprise that My Top 5 Trading Books list is well-represented above.

Of course you can always look to my growing list of Trading Book Reviews for additional ideas. And although it isn’t a print book (yet), my Trading FAQs book is a very good resource for new and developing traders.

Those looking for a lot of insight into the markets or financial operations on trading desks will be disappointed. There isn’t much. This is a book written by a woman about a woman’s experience trying to navigate her way in a largely male-dominated arena. Some of what the lead character (Alex) goes through would also be experienced by a male in terms of her treatment as a freshly hired analyst (lowest level of trading desk employee), but it takes on a different perspective seen through a young woman’s eyes. Most of the story involves relationships and trading room antics rather than stories about trades and deals and the like.

While I found the end of Bond Girl rather abrupt and disappointing, it did do the desired job of making the train trips I read it on go faster. If you go into it with serious expectations, you’ll likely be disappointed, but if you pick it up as a light read then you’ll probably find it fairly enjoyable.

Make sure to check out all my trading book reviews.

Hi John,

I bought your book because I’ve recently started trading index futures but my inner voice said something was not quite right. I started with a $10k account and got stopped a couple of times, so I was at $9780. At that point I realized that I was missing my entries because I was too busy running my own design business along with other domestic duties. Then I came across a paragraph in your book about the amount of dedicated, uninterrupted time it takes to day trade futures. Bingo-I was glad I stopped early and kept most of my capital. My mentor never mentioned any of this. Now I’m starting over and working on setting up a trading plan that can fit me — swing trading appears to be the goal at this time. I’ve been searching high and low trying to find information on how to really set up a good trading plan and your book is the first one I’ve seen that really addresses this important issue.

Sincerely,
Michele

Firstly, I’m glad Michele recognized early that she had a problem. It would have been better had she done so while demo trading so she didn’t have to lose the money she lost, of course. I definitely encourage getting real money trading experience early on in one’s development, but that doesn’t mean demo trading doesn’t have a proper place in sorting out one’s strategy and trading plan. Fortunately, Michele didn’t have to suffered an overly hard lesson.

Secondly, it doesn’t say much good about her mentor that they failed to take into account Michele’s schedule when helping her determine a good way to take on the markets. A mentor is supposed to factor these sorts of things in. Maybe we’re talking a specific stylistic mentor here, someone who focuses on one type of methodology (like day-trading S&P futures). Even still, though, they should recognize someone who is not suited for their trading approach (see Trading Coaching and Mentoring).