You probably know that most retail Forex traders lose money. In this article, we examine the statistics reported by Forex brokers on the profitability of customers under ESMA regulations, as well as the conclusions of the research on this topic, to answer the question of which traders lose or earn money in long-term Forex trading, and why.
We’ve all heard statistics cited as 95%, 90%, or 80% of people opening an account with a Forex/CFD Broker exploit their account within six months. Some traders may think this out of respect for the Pareto principle, which says that 80% of profits are made only in 20% of cases. There are ways to know with some certainty if any of these estimates can be true? Yes, according to the new ESMA regulation in the European Union, which force Forex/CFD brokers to prominently disclose on their websites what is the percentage of loss or profit of their average retail investor.
Profitability of the Clients of the Largest Brokers
All major Forex/CFDs retail brokers report very similar data, so it is reasonable to assume that approximately 70% of all CFDs retail operators lose money. The percentage of losers is very similar among brokers, suggesting that is the market and other traders, and not the brokers, those responsible for the long-term losses of their customers.
Although these data include customers operating non-French products, there is no reason to believe that the results differ between customers operating CFDs Forex and non-French. Even Forex retailers appear to be more profitable than expected, as traditional estimates of 80% to 90% as losers appear to be an overestimate.
Why do 70% of Forex retailers lose money? Now that we know that for 70% of people who try, Forex trading is not profitable, we should ask ourselves why. Finally, if markets are changing as the well-known “efficient markets” hypothesis says, then the winners and the losers should not be divided into approximately 50 – 50?
A fair division between winners and losers could make sense if Forex were a zero-sum game, as there has to be one loser for each winner, and vice versa. However, the Forex / CFD retail trade is not a zero-sum game, but a negative-sum game, because the Forex retail trader:
-You must pay a spread, a commission, or both to get in and out of an operation.
-You should normally pay a one-day commission for any open transaction that takes place around 5 pm New York time.
This means that the odds stack up against the Forex/CFD retailer. But, if it is possible to overcome these probabilities, as 30% of profitable retailers can testify. A few years ago, a large Forex retail broker published data showing two distinct differences between profitable traders and losers. Traders who:
- Made larger deposits in their accounts
- Used the lowest real lever they were more likely to be profitable
We will study each of these elements separately, although they are related because traders with lower deposits tend to use greater leverage.
Why are the best-capitalized Forex traders more successful?
Retail Forex traders who deposit more money are more likely to take their trading seriously, because they have more money invested, and they know instinctively that their chance to make a significant profit is also greater. For example, an operator who deposits 100 dollars and gets a return of 20 dollars should be as proud of himself as an operator who deposits 10,000 dollars and gets a return of 2,000 dollars, since this is the same business achievement: a return of 20%. However, very few people anywhere in the world can be excited to make $20. So, to some extent, this could just be a matter of focus and meaning.
Why are Forex traders with less leverage more successful?
A feature of retail Forex operations is the relatively high leverage offered by many Forex / CFDs brokers, specifically those outside the European Union (Australia allows Forex leverage of up to 500-1). Many brokers also allow accounts with deposits even below $100 to be opened. This means that many Forex retailers can deposit $50 and use leverage of 400 to 1 to make a $20,000 transaction. This operator will then delete your account or perhaps triple it, which would probably lead to another excessive leverage operation with a similar result. Although there is some logic at stake here – a series of winning and highly leveraged operators would be a way to get a huge return quickly in theory – the odds that such a bet will result in anything but a bankrupt account after a few operations are very small.
It is also worth recalling that lower leverage facilitates risk control and limitation, which is a key factor in long-term profitability. This issue of risk is best illustrated by the fact that once a trader has decreased more than 20 percent from its maximum capital, it becomes exponentially more difficult to recoup the loss. A loss of 20% requires a gain of 25% to be recovered; a loss of 50%, a gain of 100%.
How Is It Possible to Be a Profitable Forex Trader?
Use very low leverage or do not use it. Now that we’ve looked at the evidence, the odds look better for you. 30% of Forex traders are able to be profitable, and that number would probably be higher if not all traders using too much leverage were taken into account. So the first thing you can apply is to use a low leverage or even invest without leverage. In reality, this means not risking more than 0.5% of your account in a single transaction. Don’t try to be greedy, in the Forex trade, it’s counterproductive.
Make a significant deposit: If you can only deposit 100 USD, that’s fine, but you have to respect that $100 without getting greedy. If the $100 doesn’t mean much to you, you’re almost certainly not motivated enough to negotiate well.
Use a realistic trading strategy: You can’t expect to start doing business and make money. You have to wait for the opportunities when you think the market is putting the odds in favor of long or short trades, and then take the trades according to your plan. If you don’t have a strategy to identify those opportunities, then you’ll be groping in the dark.
It is fairly well established that markets are not efficient and that trend-tracking strategies if carefully executed, are profitable in long-term liquid markets, and that includes major Forex currency pairs such as EUR/USD and USD/JPY. One of the best-functioning strategies in the Forex markets in recent decades is to operate in these two major currency pairs up to new peaks or lows of 50 days, using relatively tight loss stops and some sort of downward profit-taking. Drawback strategies can also be used to trade Forex currency pairs profitably while on a strong trend.
Most of the time, Forex pairs have a range: if the price goes up one day, it will most likely go down the next day. It is hard to take advantage of this, but when it seems obvious that the price of a Forex pair goes nowhere, you can try to trade the bounds of the range in short terms, using adjusted stops to increase the risk-reward in winning trades.
It can be said that business strategies based on fundamental analysis are less successful in Forex, but fundamental analysis can be used to filter commercial entry signals generated by technical business strategies effectively.
Follow your trading strategy and be consistent.
Having a good and profitable business strategy will not help you use money if you don’t execute it correctly. It is essential not to be frustrated by the loss of trades, remember, it is all part of a plan to have something to lose operations, and it is not a big problem as long as you keep the sizes of small individual operations. You must expect the lost legs to be more than compensated during the winning legs. However, you must be consistent, because if you stop trading, you will probably miss the winners who would have made the difference. It is important to control your emotions: most operators are excited, but profitable operators find a way to prevent their emotions from ruining the execution of operations.
How much money can you earn by trading in Forex? In Forex trading, profits tend to arrive unevenly, so it is best to look at long-term performance as the most profitable possible performance. The results can be changing and there is no guarantee of profit, but good Forex traders tend to outperform stock market benchmarks. I’ve seen the best ways to turn $10,000 into $1 million trading Forex before.
Although investing in Forex does not bring benefits for most retailers, you can put the odds of return in your favor by using very little or no leverage, keeping the maximum risk for trading, and following an effective trading strategy without becoming greedy or impatient.
Frequently Asked Questions
Can you get rich trading with Forex?
It is possible to earn a lot of money trading on Forex, but it is very difficult to do so unless you start with a lot of money, as 70% of Forex retailers lose money in the long run. However, overcoming long-term stock markets is a realistic goal.
How much do Forex traders earn a day?
A Forex trader can earn or lose any amount of money in a single day without worrying about it, as long as the losses are not excessive. What counts is the long-term performance, as one-day trading is statistically irrelevant.
Is negotiating in Forex a good alternative?
Trading in Forex can be a good idea if you capitalize properly and trust in a good long-term business strategy, limiting risk, as it is accessible and can be a diversified investment.