Even before the Swiss National Bank reminded everyone how harsh the forex market can be, traders had a pretty unrealistic view of their chances in what is essentially a zero-sum game: 86% of retail forex traders expect to make a profit even though only 30% actually do so, and it’s mostly the smaller traders who lose out.
Forex traders: Average retail forex trade size has been falling
A presentation from CitiFX managing director Bapi Maitra on the retail foreign exchange market found that volumes have been steadily growing. There are now four million retail forex traders worldwide with 1.4 million in Europe and 1.6 million in Asia (there are only 150,000 in the US). Retail forex traders, typically men in their mid-30s, mostly say that they are in forex because it has the chance to outperform other asset classes regardless of which way the market is headed and because it’s ‘intellectually stimulating,’ but the high leverage and low initial capital requirements are clearly also big factors. You can get 50:1 leverage in the US, 200:1 in Europe, and as much as 1000:1 in some locales with starting deposits as low as $50. CitiFX shows how far average shares per trade have fallen in the US, and even though that’s only a fragment of the global online trading world, the trend seems to hold in other regions as well as small-time traders hope to strike it rich.
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‘Profitability skewed downward by micro accounts’
“Profitability is skewed downward by the many micro accounts of the company. These micro accounts, which can be opened for as little as $50, are less profitable than averaged-sized accounts because the traders take their accounts less seriously and tend to ‘go for the moon’,” said Drew Niv, CEO of not-currently-trading FXCM back in 2011, CitiFX reports.
Brokerage accounts over $10,000 have more than twice the profitability rate of smaller accounts, partially because profitable accounts are more likely to cross the $10,000 mark in the first place, but also because traders with more capital can withstand larger short-term losses.
It’s not just FXCM either, an InteractiveBrokers report bragged that it had the highest rate of profitable accounts in the industry in 3Q14: 46.9%. Its figures were a little better than the CitiFX estimates, but either way it’s clear that most retail forex traders would be better off doing something else, even when there aren’t major shocks wiping people out.