Bullshit: 95% of Traders Fail, Trading is Gambling

gamble: to take a risky action in the hope of a desired result; to stake something on a contingency; to take a chance

In the context of this definition, trading is gambling; however, so is starting a small business, going to college, getting married, having kids, buying a house, investing in the stock market. Keep that in mind as you read this post.

Dispel Mindset Toxicity or Risk Ruin

Your mindset is a fragile thing. Unlike a trading account which can be re-built over and over again due to additional capital injections obtained through work outside of trading, family, friends, etc., once your trading mindset is crushed, it’s very unlikely that you will have the ability or desire to move forward with trading. It is for this reason that it is extremely important that you treat your trading mindset with great care and sensitivity (I’m talking Hallmark Channel sensitivity). Part of that great care is dispelling and disproving all of the negative, toxic thoughts that enter your mind via external sources (e.g. goons on social media). And that takes us to the reason why I decided to write this post: to dispel the impact that two of the most toxic statements that a trader is forced to hear day in and day out will have on their mindset:

  1. “95% of traders fail”
  2. Trading is gambling and if you trade, you’re a gambler

How many times have you heard the “statistic” that “95% of traders fail”? That traders are gamblers? That trading isn’t a career choice, it’s a career mistake? All present-day traders have heard the aforementioned at least once in their career – but, with the presence of social media and the Internet, probably have heard it (and continue to hear it) a lot more than once – they probably hear it every damn day (I know that I do).

What kind of impact do you think this has on your mindset as a trader? Though it’s hard to quantify, it wouldn’t be a stretch to suggest that it plays some type of role in consciously and subconsciously shaping the mindset of most traders – especially new traders. And for many traders, it has meant the difference between pushing forward through adversity (e.g. taking shit from friends, family, and anonymous social media goons) and giving up due to destruction of mindset. This is unacceptable, especially because the “statistic” and “gambler” label is highly misleading and almost always void of proper context.

The “95%” Pseudo Statistic, Put into Context

Is there a high failure rate in trading? Yes, absolutely. Is it 95%? Who the fuck knows. Let’s just agree, though, that it is quite high. But just like in trading itself, context is key. So, let’s look at this number through the proper context.

Breaking down the 95

First of all, not all “traders” are actually traders in the sense that, not all traders approach trading with the disciplined, process-driven, probabilistic mindset that consistently profitable professional traders possess. You see these characters on Twitter every day:

  • Lazy, get-rich quick types with a completely unrealistic perspective about what it means to be a trader. These chumps are undoubtedly part of that “95%” pseudo statistic.
  • What about those who start trading with $5,000 and access brokers and markets that allow 10, 20:1 leverage? Yep, they’re included in that statistic as well.
  • What about those who are in fact, undisciplined gamblers, void of any semblance of a process? They’re part of that number, too.
  • And what about those who quit their job to get rich as a trader, giving up their sole source of income, only to find that it takes longer than originally anticipated to make money, essentially forcing them to go back to work and put trading on hold (or quit altogether)? Another part of the “95%”.

Based on what I see on Twitter, I have no doubt that the aforementioned examples make up a huge portion of the “95%”.

The question I have is, what percentage of the “95%” are traders who have adopted and actually adhere to a process-driven, disciplined, probabilistic mindset? Although it’s difficult to truly know what that number is, one can assume based sheerly on the volume of degenerates who take up trading (as a perfect example, go look at the StockTwits.com ticker feeds to see the abundance of losers who consider themselves traders) that the number is relatively low. My educated guess is less than 10%, and possibly even lower.

Why do I think that the 95% trading failure rate consists of 10% real traders and 85% gamblers? Because good trading takes a lot of work, especially in the beginning when the learning curve is substantial. Most people just aren’t willing to take the time to build a system, a process, the proper mindset. Most people don’t have the maturity to be a trader. Most people aren’t willing to act like traders because the process of exceptional trading can be boring. Most people suck at managing their own money.

The point is, the pool of those in society who actually have the drive and the mental, emotional, and financial maturity to develop the qualities necessary to be a successful trader is very small. Yet society is full of individuals who want to make a lot of money and want to make it fast – individuals who undoubtedly are drawn to trading and to the markets. And thus, the 95% failure rate is inherently flawed as it relates to your odds of success if you’re a trader who acts like a trader (more on that below) because the failure rate is comprised of a significant percentage of jokers who want to get rich fast by taking massive risks (i.e. not acting like traders). In other words, traders who act like traders are being lumped in with degenerate gambling bozos which significantly distorts the true trading failure rate, since degenerate gamblers are being lumped in with actual traders.

Failure rates of common life endeavors

Second, anything with potential reward carries with it risks and varying rates of failure. Let’s look at some examples of other, not as often discussed, failure rates in order to further put the “95% of traders fail” pseudo statistic into a more proper and meaningful context.

Note: Just as with the widely reported 95% trading failure rate, I believe the following failure rates to be potentially flawed; however, these are the widely reported failure rates, so we are comparing apples to apples when comparing them to the trading failure rate. 

The aforementioned failure rates – all failure rates that are commonly accepted and reported when doing research on the Internet – demonstrate that, on the surface, failure is a part of life for most of us. However, just as is the case with the trading failure rate, if we were to eliminate some of the common variables that lead to failure with these endeavors, then the failure rate of those who start a small business, go to college, or get married without said variables in the picture would look much better.

Let’s take small business for example:

  • Small business: A small business is more likely to fail due to:
    • Lack of experience
    • Insufficient capital
    • Poor location
    • Poor inventory management
    • Over-investment in fixed assets
    • Poor credit arrangements
    • Personal use of business funds
    • Unexpected growth
    • Competition
    • Low sales

And college:

  • College: Variables that increase or decrease your probability of failing college:
    • Full-time students are 55% less likely to fail at college than students who go to school exclusively part-time.
    • Students who start college before turning 20 have a 13 – 22% lower chance of dropping out than those who start college after turning 20.
    • A study showed that children from low-income households were 7.6x less likely to complete a bachelor’s degree than those from well-off households.
    • 40% of college dropouts have parents who do not have a degree higher than a high school diploma.

And marriage:

  • Marriage: You’re less likely to get divorced if:
    • It’s your first marriage
    • Your parents are still married
    • You are over the age of 25
    • You went to college

So again, though the failure rates of the aforementioned endeavors are all considerably high, it’s important to apply the proper context to each failure rate in order to eliminate a large portion of the participants from each endeavor who really had no business taking up said endeavor in the first place (I consider these individuals to be gamblers, much like the gamblers included in the trading failure rate). The odds are significantly against them, and with those odds, they face great risk of ruin (more on those specific risks of ruin soon) across a variety of spectrums. Again, gambling.

“Trading involves significant risk of loss and is not suitable for all investors.”

As traders, we see this disclaimer all of the time. But why don’t we see this same disclaimer for small business loan commercials? Or those feel good college education commercials? And what about the nauseating eHarmony commercials? Do you ever hear them end a commercial spot with “Marriage involves significant risk of loss and is not suitable for all people.”? Of course you don’t. But – based solely on the numbers – all 3 of these commonly accepted and encouraged endeavors carry with them their own degrees of significant risk and danger. Yet trading undoubtedly gets the most significant scrutiny and stigma applied to it.

Gambling: A Balancing Act Between Probabilities and Risk vs Reward

After reading about these failure rates of very common endeavors for a high percentage of people in developed, free countries, think about this:

  • How many people who opt to start small businesses are referred to as gamblers or degenerates by their family and friends? The mainstream, broadly reported failure rate of small businesses is almost identical to that of the commonly discussed trading failure rate. Moreover, those who start small businesses usually put a great deal (or all) of their own capital into the business, oftentimes not taking a salary nor making money for years from the date of inception (and that’s if they are successful). What happens to that capital when their business fails? It’s gone. Is that risk not as great as that of a trader? Then why is the same stigma not more commonly applied to small businesses?
  • How many students who opt to go to college are referred to as gamblers or degenerates by their family and friends? With a 56% failure rate among college students who started at a 4-year college but dropped out by year 6, are the odds not, on the surface, against the student? Mix in the fact that a high percentage of students take out student loans to fund their education and are students not taking on a even more significant risk? Yes, if they graduate, then they have the potential to find a well paying job in their field which can help mitigate some of said risk. However, there’s no guarantee that they will find a job. That sounds like a pretty big gamble to me. But again, you typically don’t hear the same stigma associated with getting a college education as you do with trading. Why not?
  • How many people who opt to get married for the 2nd and 3rd time are referred to as gamblers by their family or friends? With 2nd and 3rd marriage failure rates at ~60% and ~70% respectively, is getting married a 2nd and 3rd time not a massive gamble, especially given how emotionally and financially devastating divorces can be for both men and women? And when kids are involved, the gamble is even greater. Again, the same “gambling” stigma applied to traders doesn’t seem to be applied to those who are looking to get married.

As mentioned earlier, traders are commonly viewed as gamblers. However, based on what we’ve discussed so far in this article, is it not fair to say that starting a small business, going to college (especially with student loans), and getting married (especially 2nd and 3rd marriages) are all forms of gambling? Well, in my opinion, we can’t properly answer this question until we’ve examined each endeavor’s risks and rewards.

Risk vs Reward Comparison

I’ve heard many times that you’re gambling when the odds are against you. But looking at gambling through the lens of probabilities isn’t enough, in my opinion.

When you gamble, you take a risk betting that the outcome (reward) will be worth the risk. Thus, it seems most fitting that in order to properly gauge the degree to which something is to be considered gambling, one must look at the probabilities in addition to the Risks vs Rewards. Since we’ve already discussed the failure rates of small businesses, college students, marriage, and trading, let’s now look at their risks and rewards.


Small Business Risks vs Rewards

Risks:

  • Losing all of your initial investment if the venture fails.
  • Suffering significant lifestyle setbacks for yourself and, if applicable, your family, if not able to turn a profit and take a salary and/or distributions.
  • Neglecting, damaging, or even destroying relationships due to lack of time or stress caused by trying to build a successful small business.
  • Significantly damaging your own mindset should the small business venture fail.
  • Potential health problems due to the stresses of running a small business or dealing with a slowly failing business.

Rewards:

  • Be your own boss
  • Set your own schedule
  • Unlock your potential as a human being
  • Employ others, allowing you to take a direct role in the potential enrichment of the lives of others and their families.
  • If successful, potentially make good (or great) money.
  • Build a family business legacy which can be passed down from generation to generation (theoretically, but this is more vulnerable to potential seismic shifts in the marketplace or to the health of the economy).

College Risks vs Rewards

Risks:

  • Failing to graduate
  • Carrying varying degrees of student loan debt (obviously, the more debt the greater the risk).
  • Carrying varying degrees of student loan debt without a job or without a well paying degree-related job out of school (and potentially for years to come).
  • Seismic shifts in the marketplace which could potentially limit or wipe out your career options.
  • Damaging relationships with friends or family due to the need to focus on higher education.
  • Significant mindset and/or emotional distress due to either a) failing at college (with or without student loans) or graduating college but b) not being able to find a job at all or c) not being able to find a job that pays well (with or without student loans).

Rewards:

  • Graduating with a degree which has the potential to help you secure a high-potential job or career (with no guarantees).
  • If able to find a well paying job related to degree, then having a higher income compared to peers with less education.
  • An increased probability of financial security and relational security (i.e. better marriage).
  • Being able to say that you graduated from college.

Marriage Risks vs Rewards

Risks: With divorce comes the risk of:

  • losing financial assets (such as your house), to varying degrees of significance.
  • exposure to alimony payments
  • unfair child support payments
  • losing regular access to your children (men are especially at risk here, specifically in the U.S., due to significant court bias in favor of women).
  • separating from and losing a potentially close friend (your spouse).
  • having a strained or severed relationship with your in-laws and/or other spousal relatives.
  • having a strained or severed relationship with your parents, siblings, and/or relatives.
  • having a strained or severed relationship with friends that both parties shared during the marriage.
  • significant emotional pain and suffering due to having to experience a divorce.
  • knowing that if you get married again, your next marriage would carry with it an even higher potential divorce rate (61% for 2nd marriages).

Rewards: With marriage comes the reward of:


Trading Risks vs Rewards

Risks:

  • Losing all of your trading capital, which you may or may not be able to afford to lose.
  • Suffering significant lifestyle setbacks for yourself and, if applicable, your family, if not able to obtain profitability.
  • Neglecting, damaging, or even destroying relationships due to lack of time or stress caused by trying to become a successful trader.
  • Significantly damaging your own mindset after severe or compounded setbacks.
  • Potential health problems due to the stresses of learning to trade or dealing with a trading account in a perpetual or significant state of drawdown.

Rewards:

  • Be your own boss
  • Set your own schedule
  • Unlock your potential as a human being.
  • If successful, potentially make good (or significant) money.
  • Build a family trading business legacy which can be passed down from generation to generation (not nearly as vulnerable as a small business legacy since the market will always be open for trading (unless the world comes to an end)).

Trading, Small Business, College, and Marriage Can All Be Gambling

By writing this blog post, am I trying to suggest that you shouldn’t start a small business, go to college, or get married due to the broadly reported high rates of failure associated with each? No. What I’m saying is, if you’re interested in starting a small business, going to college, or getting married, take the time to understand the failure rate numbers. Understand which variables may increase your probabilities of failure and which variables may increase your probabilities of success. Then, based on that, determine if you have a more likely chance of succeeding or failing at your specific venture. Once this is determined, then you need to measure the risks vs rewards. It’s only after you do these two things that you can come to your own conclusion about whether or not something should be considered gambling or whether it should be considered just taking a damn risk.

The main point that I want to drive home is the following: All 3 of the aforementioned, commonly accepted and promoted by society, life changing decisions carry with them significant levels of emotional, relational, and financial risks, just as trading does. Each have varying degrees of potentially high failure rates. Each have potentially promising rewards. But we as traders are led to believe that attempting to become a trader is a shameful endeavor, a form of gambling, with a failure rate and risk factors far greater than other more common life endeavors (such as those mentioned in this post). Based on the research I’ve done (and included in this post), that’s complete bullshit.

Can trading be gambling? Yes, absolutely. But based on the information described and cited in this post, so can starting a small business, going to college, or getting married. You need to determine if the potential failure rate is lower (or higher) for your particular situation prior to determining if you’re gambling or just taking a risk (people take risks every single day, risks are a part of life).

(Degenerate) Gambler vs Trader

In terms of trading, I did my homework. I knew that the 95% trading failure rate statistic, even if slightly true, was comprised of a great deal of:

  • undercapitalized,
  • overleveraged,
  • undisciplined,
  • immature (financially),
  • impatient,
  • unrealistic,
  • lazy,
  • egotistical,
  • unprofessional

idiots who had no business opening a $1,000 – $5,000 Futures account in the first place. When you take all of those degenerates out of the picture, the true trader failure rate is much lower, specifically for those who:

  • are well capitalized relative to their risk
  • never abuse leverage (i.e. compromise risk management controls)
  • consistently practice discipline in routine and process
  • have their personal finances under control and spend less than they make
  • practice patience-building exercises every day
  • understand the realities of trading and potentially how long it can take to reach consistent profitability
  • have a strong work ethic, always looking to learn and grow
  • keep their ego in check
  • approach trading as a business, with a fucking business plan

Change Your Perspective on Risk

The way I look at it, given that our time alive is finite, are you risking more working a 9-5 job for shit pay, longing for the weekend to come, doing something that you may not even like, or are you risking more taking a chance to unlock your ultimate potential as a free human by doing something that you love by starting a small business or trading? I say small business or trading because the risks and rewards between the two are very similar, as previously outlined in this post. However, I personally believe that the rewards are much greater with trading, which is one of the reasons why I gave up my six figure income as a small business owner years ago to pursue a career as a trader.

Traders Are Small Business Owners, Not Gamblers

In closing, the next time someone parrots the 95% trading failure rate to you, or condescendingly and negatively infers that trading is gambling or that you’re a fool for attempting to become a trader, remember this post (or better yet, send them this post to shut them up). Most importantly, remember this:

  • If you approach trading like a trader and not a degenerate gambler, then you’re taking a risk similar to that of a small business owner with, in my opinion, a much more favorable reward profile. By approaching trading in this manner, you are a small business owner, not a gambler, with a much, much lower potential failure rate than 95%. Most importantly, don’t be an idiot and get married for a 3rd time for fuck’s sake.

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