Ratio of Profitable Accounts at
During the 2nd quarter of 2017 in the above
graph (April, May, June), the percentage of traders short at OANDA
while the price is going up is about 64% in April and 67% in May and
June. In the overall forex market, the ratio was closer to 73%.
Likewise, the percentage of traders long at OANDA during this
period was about 36% in April and 33% in May and June. For the overall forex market, the percentage of traders long while the market was going up was only about 27%.
These numbers are important
because they correspond perfectly with the percentage of OANDA's ratio
of profitable accounts.
Every 3 months, OANDA publishes the
percentage of their accounts that are profitable and unprofitable.
Here is a snapshot of this same time period of their traders'
Now, OANDA actually has one of the
highest ratio of profitable traders in the industry. Many other
brokers have significantly less profitable traders, which corresponds to them also having more people taking the wrong side of the trade.
This fact just
goes to show that there is almost a perfect correlation
between trader sentiments (long vs short) and profitable accounts.
The 67% of unprofitable traders are
trying to predict the trend reversal by selling the currency pair
when the prices is going up. Conversely, the 33% of profitable
traders are following the money by buying the currency pair as the
price goes up.
Reading this, you might wonder how it
is possible for forex traders to be this stupid, but actually trying
to predict the trend reversal is an extremely easy trap to fall into.
also would try to predict the trend reversal when I first started trading in the forex market, and of course I was wrong most
of the time.
In fact, most of the money I lost in those early days
was from thinking the trend was going to reverse, instead of
confirming that the trend had reversed.
People often email profitable traders asking what they think will happen during a news event. They ask, "How will the market react?"
Why are they asking a question like this? Because they want to gamble. They want to take a bet on the direction the market will take before the news event.
Here's the truth: The market doesn't care what
you or I think is going to happen. Even when a news event is
good for a country, sometimes the currency still depreciates against
your expectations. So, you have to let the market tell you what it IS
doing, and then you just need to follow the money.
In fact, the only way to make money in
the forex is to trade long-term and just follow the money once a
trend has confirmed a reversal. Granted, there is a little
more to it than that, but that's How to Win in Forex in a nutshell (click the link to learn more about why trading long-term is more consistent and profitable than daytrading).
Bonus: Another Huge Mistake Made by Forex
It is reasonable to conclude that since the
majority of forex traders consistently lose money, that you should
not trade how the majority trade. And how do the majority trade?
Let's take a look at a graph of OANDA's
open positions in their Forex Order Book:
Let me explain what is going on in this graph.
The overall trend on the EUR/USD is
going up. The left side is short positions, and the right side is
The colors represent profitability, with blue being
unprofitable and orange being profitable. As you can see in the
bottom left blue section, most traders are short when the price is
However, I want you to notice something different in this
graph. Notice that the majority of the trades are clustered extremely
close to the current price.
No matter when you look at OANDA's Forex
Order Book, this trend is basically always present (look at the right graph of "Open Positions"):
Why is this trend always present?
Because most traders are daytrading, or otherwise trading short-term.
And sure, there are traders who are clearly profitable (orange) in
this graph, but are they the same traders consistently?
Take a look at the forex traders that
are more than 100 pips away from the current price.
There are a ton of
them who are short (blue) and -200, -300, even as much as -800 pips in
losses (clearly these traders did not use a stop-loss -- they let their
losing trade continue to run).
However, there are about 5%
of traders (circled in red) who are +200, +300, or even +800 pips profitable.
They went long
over a month ago on the EUR/USD, following the money, and are now
over +500 pips in the profit. These are the smart forex traders, who trade
long-term and follow the mega-trends.
These smart forex traders know How to Win in Forex.