The ‘Survivorship Bias’: Overlooking the Failures

Filed under: Learn Forex Trading |

The ‘survivorship bias’ is an interesting theory that we could use in our formulation of a workable forex trading methodology. The theory proposes that people often make a logical error and focus their attention on those few who succeed rather than a majority of people who fail. This is largely due to the visibility of those who succeed and the invisibility of those who fail.

 

In the world of forex, we could use this theory in the following way. Let’s take signals service providers. You look online and find ten such services – all of which are turning a profit. You take a good look at the figures and decide to invest, as the risk levels seem reasonable. However, if you had known that after one year, 99 out of 100 of these signals service providers carry a loss and disappear off the radar, would you still have invested? I don’t think so. The same could be applied to mutual funds as well. It seems that many of them are profitable, but the ones that fail often simply disappear.

 

In the short term, many people will be successful at forex trading due to the laws of probability. Some will fail, some will succeed, and some will break even. The true test of skill comes in the long-term performances of traders. If they can be profitable over thousands and thousands of trades with a relatively linear positive equity line, then it can be postulated that these people are skilful traders. However, do not think you are a genius just because you are profitable in your first three months of trading. You might just be a part of the survivorship bias. Try to look at the big picture and review your trades every year or so. The long term picture is the only picture that really counts.

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