There's a Well-Known Rule in Trading Circles Called the "90-90-90 Rule"

Understanding the 90-90-90 Rule

The "90-90-90 rule" is a widely recognized phenomenon in trading communities that describes a harsh reality faced by novice traders. This rule, also known as the 90% rule in trading, states that 90% of traders lose 90% of their money within their first 90 days of trading. This statistic is not merely a coincidence or an unfortunate outcome of poor decision-making. Rather, it represents a systematic pattern that has been observed across various trading markets and timeframes. The rule serves as a cautionary tale for those entering the trading world, highlighting the significant challenges and risks involved in market participation. The prevalence of this pattern, often referred to as the 90% rule in trading, suggests that the trading industry's structure itself contributes to this outcome, creating an environment where the majority of retail traders are positioned to fail while the system benefits from their losses. Understanding what the 90% rule in trading truly means is the first step toward recognizing the inherent challenges in trading and the importance of proper education, risk management, and realistic expectations.

Smart Money vs. Dumb Money: The Market Dichotomy

In the financial markets, participants are broadly categorized into two distinct groups: "smart money" and "dumb money." Smart money refers to institutional investors, hedge funds, market makers, and experienced professional traders who have access to superior resources, information, and analytical tools. These entities often have the capital, expertise, and infrastructure to influence market movements and identify profitable opportunities. On the other hand, dumb money represents retail traders—individual investors who trade with personal capital and typically have limited resources and market insight. This classification is not meant to insult individual traders but rather to describe their position in the market hierarchy and helps explain what the 90% rule in trading demonstrates about market dynamics. The fundamental strategy of smart money is straightforward: systematically transfer wealth from dumb money participants into their own accounts through various market mechanisms. This transfer occurs through superior information access, algorithmic trading advantages, larger capital reserves that can move markets, and the ability to anticipate and exploit the predictable behavior patterns of retail traders. This dynamic consistently plays out across global markets, with institutional players profiting from the mistakes, emotions, and limited resources of individual traders, which directly contributes to the 90% rule in trading statistics.

The Role of Liquidity in Market Profitability

Liquidity is the lifeblood of financial markets, representing the ease with which assets can be bought or sold without causing significant price changes. For smart money to execute their strategies effectively and profit consistently, they require substantial liquidity—meaning there must be enough buyers and sellers in the market at any given time. This is where dumb money plays a crucial role in the market ecosystem and helps explain the 90% rule in trading phenomenon. Retail traders, despite their individual disadvantages, collectively provide the necessary liquidity that allows institutional investors to enter and exit positions smoothly. When smart money wants to buy large positions, they need sellers; when they want to sell, they need buyers. Retail traders fill this function, often taking the opposite side of institutional trades without realizing they're being used as liquidity providers. Without this constant flow of retail participation, markets would experience significant friction, wider bid-ask spreads, and increased volatility that would make it difficult for large institutions to execute their strategies. In essence, the presence of dumb money makes markets function efficiently for smart money, enabling smooth transactions and profitable operations—a reality that underlies what the 90% rule in trading represents.

The Zero-Sum Game Nature of Trading

Trading in financial markets operates fundamentally as a zero-sum game, meaning that one participant's gain directly corresponds to another participant's loss. This concept is critical to understanding what the 90% rule in trading is and why it exists, as well as why most retail traders struggle to achieve profitability. Every dollar earned in the markets must come from somewhere—specifically, from another trader's account. When you profit from a trade, someone else on the opposite side of that transaction experiences a loss. Conversely, when you lose money, your loss becomes someone else's profit. This reality creates an intensely competitive environment where for every buyer, there must be a seller, and the continuous cycle of winning and losing never stops. The zero-sum nature means that profitable trading is not about creating value but about successfully predicting market movements and positioning yourself on the correct side of trades more often than not. Given that smart money has significant advantages in resources, information, and experience, retail traders are statistically more likely to end up on the losing side of this equation, which explains what the 90% rule in trading fundamentally represents. Understanding this fundamental principle helps explain why the majority of traders fail and why the markets are structured to favor those with superior capabilities.

Conclusion

The "90-90-90 rule," often simply called the 90% rule in trading, encapsulates the harsh reality of retail trading, where the overwhelming majority of individual traders experience significant losses within a short timeframe. This phenomenon is not accidental but rather a byproduct of how financial markets are structured and operate. The dichotomy between smart money and dumb money creates a system where institutional investors systematically profit from the participation of retail traders, who provide essential liquidity while often making predictable mistakes. The zero-sum nature of trading ensures that wealth is constantly transferred from less experienced, under-resourced participants to more sophisticated players with superior advantages. For aspiring traders, understanding what the 90% rule in trading means and these market dynamics is crucial. Success in trading requires not only technical and analytical skills but also a realistic appreciation of the challenges involved, proper risk management, continuous education, and the psychological fortitude to operate in an environment designed to favor institutional participants. Recognizing one's position in the market hierarchy and the systemic forces at play is the first step toward developing strategies that might help avoid becoming another statistic in the 90% rule in trading. By comprehensively understanding what the 90% rule in trading represents, traders can better prepare themselves for the challenges ahead and develop more realistic expectations about their trading journey.

FAQ

What is the 90 percent rule in trading?

The 90 percent rule states that 90% of new traders lose 90% of their capital within the first 90 days. This occurs due to inexperience, poor risk management, emotional trading, and lack of proper planning. Success requires education and disciplined trading strategies.

Is it true that 90% of traders lose money?

Yes, approximately 90% of traders lose money. This occurs primarily due to poor risk management, emotional trading decisions, and lack of proper strategy. Successful trading requires discipline, continuous learning, and experience.

What is the 90-90-90 rule in trading?

The 90-90-90 rule states that 90% of traders lose 90% of their capital within the first 90 days of trading. This rule emphasizes the high risks and challenges beginners face, highlighting the importance of education, risk management, and trading discipline to succeed in crypto markets.