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Trading on the foreign exchange is not lucrative for everyone. The most common criticism is that an overwhelming majority of traders lose their deposits. Indeed, spectacular figures like 95%, 90%, or 80% deter many people. But how do they compare with actual stats on client profitability? And how do you lose money in Forex trading? Read on to discover objective figures and research findings, as well as tips for better results.
According to the percentages cited by critics, only 10-15% of all Forex/CFD clients make a profit. These claims must be examined closely. At first glance, the proportion looks similar to the Pareto principle. This universal rule is applied to many spheres of human activity. Here, it says 80% or result (i.e., Forex trading profits) is achieved by 20% of effort (i.e., traders). However, real figures tell a different story.
Primary Sources of Data
Today, retail Forex trading statistics are easier to collect than before. Brokers operating in the EU are obliged to comply with requirements of the European Securities and Markets Authority. This involves the disclosure of the average retail investor’s gain or profit, which is expressed as a percentage.
The indicator is displayed on official websites. This is the key source of accurate data to answer the question “Is Forex trading profitable?”. Here is what the biggest intermediaries in the world (by volume) report today.
Nearly two-thirds — 70% — of CFD traders lose money. This is valid across the board. The stats suggest that the reason lies with the marketplace and clients themselves, rather than brokerages.
Of course, Contracts for Difference are derivatives, not currency pairs. Nevertheless, industry experts believe that proportions are largely similar. To conclude, there are grounds to suggest just a third of clients make money Forex trading.
Why Is Forex Trading Profitable for Some Clients Only?
According to the efficient-market hypothesis (EMH), prices in a financial market are random. As new information flows in, assets gain or lose value. From here, one could deduce that the proportion of winners and losers should be even. As we have already seen, this is not the case for the foreign exchange. The system clearly does not work. So, what is Forex trading all about?
The randomness principle does not hold true because trading involves fees and other charges. If Forex zero-sum game really existed, even distribution could be expected. However, a retail trader needs to pay for their access to the market. This includes spreads or commissions (depending on the broker) to open and close a position. Overnight trades that remain open after 5 pm EST also require a fee.
The negative-sum arrangement means the odds are against every trader by default. Still, anyone has a 30% chance of winning. So, what are the keys to success in Forex and CFD trades?
How Do You Lose Money In Forex Trading?
A few years ago, a large brokerage published a comparative analysis of its losing and winning clients. The conclusions were clear-cut. Profitability was more likely for those who:
- kept true leverage low, and
- deposited bigger amounts.
Hence, unsuccessful traders deposit less and use higher leverage. These factors are interconnected. But why do larger deposits work to your advantage?
Make Money Forex Trading: Deposit Tips
Thoughtful depositing helps to make money currency trading. The more you invest, the more seriously you take the activity. This is a psychological effect that usually holds true. Every trader realizes it instinctively. When a lot is put at stake, hefty profit is more probable. However, it all depends on what constitutes a large sum for you.
Compare two scenarios. In the first case, a $200 deposit brings $40 in profit. In the second case, the deposit is a hundred times bigger — $20,000, and the return is $4,000. Which of the two situations is more likely to make you proud?
In both cases, traders receive a 20% return on their investment. However, few of us would feel excited over 40 dollars. The bottom line is: it is all about your subjective meaning of profitable trading.
How to Use Leverage
The opportunity of high leverage is offered to retail traders of both derivatives and currencies. This is particularly pronounced outside the EU. Besides, many intermediaries provide affordable access with minimum deposits of under $100. For instance, so-called cent accounts may be used with just $10. This makes trading affordable to anyone, but leverage is a double-edged tool.
Imagine that a trader opens a live account with $40 and trades on margin with 1:500 leverage — i.e., one trade amounts to $20,000. The client may either lose their entire deposit at once or increase it considerably. A positive outcome of the first attempt triggers a series of subsequent trades. When several high-leverage decisions in a row bring profit, the trader earns a hefty amount within a short time span. This is, however, a gamble, and it is much more likely to result in a blown account. Greed is counterproductive.
Generally, the lower the leverage — the easier it is to control risk. When you take a long view (which you should), risk management is vital. Here, an important threshold is a loss of 20% from peak equity. This is because afterward, it gets increasingly challenging to recoup your losses. To compensate for 20% lost, one needs 25% gained. A loss of 50% requires a profit of 100%, and so on. Overall, the proportion of winners would be higher if everyone kept their leverage low.
How Much Can You Expect To Make?
It is challenging to make profits steady. No brokerage will guarantee returns, as everything depends on your ability to spot and foresee trends. The most lucrative performance is observed in long-term scenarios, so focus on these. On the whole, shrewd players do better than traders of benchmark stocks.
Your profit should compound and grow exponentially. For instance, if you intend to earn a million, but have only $10,000 in your account, do not expect quick results. After all, your investment needs to grow a hundredfold (disregarding taxation). A more realistic scenario would involve working for over 10 years, achieving an annual return of roughly 59%. Here, you have to focus on the long-term dynamics, and learn to accept minor losses that are inevitable along the way.
Key Takeaways from Trading Strategy Guides
How profitable is Forex trading? As we have seen, this question has no definite answer. There are many variables which affect the outcome of a trade. What is clear, however, is that your actions must be consistent.
Overall, the fundamental approach is seen as less effective than the technical one. Nevertheless, it may still help you to sift through entry signals obtained through technical analysis.
Over the decades, the Forex community has developed quite a few viable methods. These share important characteristics. Follow these guidelines to enhance your odds of success.
Very Low/No Leverage
Keep your leverage modest, and the odds of profit will be higher than 30%. You could even manage without it. A rule of thumb is to risk 0.25% — 0.5% of available funds on each trade. Even if the market looks upbeat, avoid overestimating your odds. Emotions are every trader’s worst enemy, be it exhilaration or panic.
You do not have to deposit a lot if it is not affordable. Invest as much as you can. As long as the amount has value, and you take trading seriously, it is perfectly normal. Otherwise, you may lack the motivation to trade the money well.
Do not expect spectacular gains from the outset. Profit is no piece of cake. Success relies on experience, as well as incessant learning and improvement. A rational participant determines the most favourable entry or exit point based on market conditions.
Traders use fundamental and technical analysis to make informed decisions. Trading on a hunch rarely pans out. Long or short positions should be chosen based on the predicted direction of the price.
Control over Feelings
Your strategy should not just exist in your head — you need to follow it rigorously. Negative market sentiment can trigger impulsive trades, and result in even larger losses. Consider the panic on the stock market after the COVID-19 pandemic was declared. When the exchange reacted with a plunge, investors started short-selling their assets for fear of growing losses. However, as markets return to their average, emotional moves may result in missed opportunities.
Losses as Learning Opportunity
A loss should not be perceived as a disaster. It is a normal element of trading experience, as long as your volumes are reasonable. Derive lessons from failed trades and adjust your actions accordingly. Do not let frustration or panic get to you. You will compensate for any losses later on.
As we have seen, market efficiency is a fallacy. What is the best way to trade Forex today? There are grounds to suggest two things:
- strategies based on trend tracing work, and
- careful decisions in liquid markets bring long-term gains.
Some of the most liquid instruments to trade are Major currency pairs (e.g., EUR/USD or USD/JPY). These are related to fiscal systems of developed nations. High liquidity means that buyers and sellers of the instruments have a little problem connecting in the OTC marketplace.
Example: Pullback Strategies
If a trend is strong, try the Pullback strategy. This is based on the premise that markets rise and fall all the time. Pullback involves jumping in once the market goes against the trend — for instance, a dip has followed an upward movement. Prices for currency pairs move within a range most of the time. This means if they rise today, tomorrow is likely to bring a fall.
Capitalizing on this tendency is not easy. However, you may focus on the limits of the range and trade the bounce points within a short-term scenario. To ensure sufficient reward-to-risk ratio, it is necessary to use tight stops. This requires a solid understanding of stop-loss orders.
Stop-loss allows for automatic execution. Once a certain point is reached, your stop order turns into a market order. Choose the right option to check your knowledge below. Which of the following is a characteristic of a stop-loss order? When does execution happen?
- When the price for your asset drops below a certain point;
- When the price for your asset drops or rises beyond a certain point;
- At a pre-set time.
A common misconception is that the feature only works for long positions. In reality, it also protects short-sellers. Generally, the traded instrument is either auto-sold if it falls below the stop price, or auto-bought if it moves above the current price.
Historically, one of the most efficient strategies has been based on breakouts for the most liquid pairs. Traders wait for the value to break out of its current range, achieving new highs or lows for 50 days. It is essential to set tight Stop Loss and trailing Take Profit.
How Profitable Is Forex Trading: Bottom Line
Can you make money with Forex? Definitely. Even getting rich is theoretically possible, but only for investors who begin with sizeable deposits and laser-focused strategies. According to the available data, 70% of clients lose their deposited funds in the long run. This means you have a 30% chance of succeeding, and higher odds if you use low or no leverage. Generally, it is not impossible to outperform the stock exchange.
It is vital to understand that a trader could win or lose, and losses are inevitable. Moreover, they are meaningful and important. As long as they are not excessive, failed trades should not be construed as disastrous. In the long-term scenario, minor losses are negligible. Your worst enemy is not a loss — it is emotions.
There are many ready-made strategies you can try. Use prudent risk management, follow trading strategy guides and remember to set stop limits. If your deposit is sufficient, the strategy is solid, and risks are limited, success is feasible in the long run.
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