Today, I’ll let you in on a secret: most currency traders lose money. But keep it on the hush. No one has to know. Let’s keep denying what’s obvious to see. Let’s fool ourselves that their luck is indeed genius. Let’s keep cheering their “illusion of control”. Well, any day but not today.
This is the hour of truth. We’ll shout these wise words from Friedrich Nietzsche: “Sometimes people don’t want to hear the truth because they don’t want their illusions destroyed.” So, here comes the question: Can the average Joe make a living trading currencies? Yes, when hell freezes over first. Here are few reasons why.
Three years ago, research done by DailyFx showed why most online currency traders eventually end up in the red.
Looking through over 40 million real trades (traded across 15 most traded currency pairs) placed via a major FX broker from 2014 (quarter two) to 2015 (quarter one), traders were found to be right more than 50 per cent of the time. But why did they lose money?
Losses on losing trades were greater than profits on winning trades. In EUR/USD for instance, most positions were closed out at a profit 61 per cent of the time but the average losing trade was worth 83 pips while the average winner was only 48 pips. In GDP/USD trades, traders captured profits on 59 per cent of all trades.
However, average winning trade turned 43 pips while the average losing trade lost 83 pips. In other words, traders let their losses run and cut profits short.
The implied conclusion here is that most people are not psychologically built to trade the Sh50 trillion-a-day market.
Little wonder, FXCM, one of the pioneers of retail FX market carries this disclaimer; “79.8 per cent of retail clients’ accounts lose money when trading FX/CFD’s on its platform.”
Another reason shaking out most private traders is leverage — the famed two-edged sword. The option for 1:400 leverage or 0.25 per cent is enough rope to let traders hang themselves.
Giving this amount of power is no different to giving a drunk adolescent a Ferrari to compete in a street race. Do you except the car back in one piece? Matching the average trader (who’s terribly indisciplined) with a product that’s structurally expected to give a negative return, it’s only the platforms that’ll make money.
Please understand, the currency market serves a meaningful purpose and opportunities to profit exist, but when reasonable restrictions don’t exist, it becomes a self-destruction paradise.
Perhaps, Capital Markets Authority needs to consider European Securities Market Authority’s recent decision to limit excessive leverage. 10:1 is a good start.
One other problem is negative slippage — when an order is filled at a price that is different from the requested price.
To give an example, a trader attempts to buy the EURUSD at 1.3650 but the trades suddenly gets filled at 1.3680 (30 pips above the requested price).
This fraudulent practice happens all the time. Though not all of it is broker-initiated, some slippage is deliberate causing huge losses to traders.
Here’s my final analysis: when your odds to profit are next to slim, only fools rush in and the wise walk away.