You might have often heard that the majority of retail Forex traders lose money while trading. In the following article, we look into the statistical reports by different Forex brokers on trader profitability under the regulations of ESMA.
Moreover, we will discover the conclusions of the research for answering the question as to which traders make money or lose money in long-term Forex trading and for what reason. If you think you are among those who can put the odds in their favor, then kindly refer to our list of the best Forex brokers and register yourself right away!
We usually come across statements like 80%, 90%, or 95% of people who register with a Forex/CFDs broker enhance their account in just six months. Some people are likely to believe the fact out of respect for the Pareto principle, according to which % of profit is made by only 20% of Forex traders.
Now, do we have any way to ensure if any of these is right? Yes, because of new ESMA regulations in the European Union that obliges CFD brokers/ Forex to disclose clearly on their sites their average retail investor’s percentage gain or loss.
If we analyze the actual statistics published by the few biggest CFDs/Forex brokerages in the world (in terms of trading volume),
some important conclusions can be concluded from the self-reported, which are:
- All the largest retail CFDs/Forex brokers report very similar reports. Hence, it is reasonable to assume that almost 70% of all retail CFD traders lose money.
- The percentage of retail trading losers is similar between brokers, saying that it is the market and the traders, not the brokers that are responsible for their customer’s long-term losses.
- Nonetheless, the statistical report includes clients trading non-Forex products, so there is no reason to believe that the results are different between non-Forex CFDs and clients trading Forex.
- Some even believe that the retail Forex traders are more profitable because the traditional estimate of 80% to 90% as losers seems like overestimating.
Why do 70% of Retail Forex Traders Lose Money?
So, now you know that approximately 70% of people who try Forex trading do not gain profits, let’s find out why. After all, if the markets are random like the classic “efficient markets” hypothesis suggests, then the winners and losers should have an even division of 50-50.
Losers finance the winners, and likewise, so if Forex was a zero-sum game, then an even division between Forex winners and losers should make sense. But, retail Forex/CFDs trading is not a zero-sum game rather a negative-sum game as the retail Forex traders:
- Have to pay either a commission, spread or both for entering and exiting trades
- Have to pay an overnight fee on open trades that are held after 5 pm (New York time)
So, the meaning of this is that the odds await for the retail CFDs/FX traders. However, no Forex/CFD trader can overcome the odds in trading, as the 30% of profitable retail traders can confirm.
A few years ago, a large retail Forex brokerage released data that showed two apparent differences between losing and profitable traders. Traders who had chances to become profitable were those:
- Made high deposits in their Forex trading accounts
- Made use of right low leverage
We will have a look at all these factors, although they are similar because the traders who make lower deposits are likely to use higher leverage.
Why are Better Capitalized Forex Traders More Successful?
The retail Forex traders who make massive deposits are more likely to take their trading activity seriously. The reason is that they put more money at risk and know intuitionally that their chances of becoming profitable are as high too.
For instance, a trader that deposits an amount of $100 and gets back $20 must be proud of him in comparison to a trader who deposits $10,000 and gets-back $2,000. They both are making the same profit, i.e., a 20% return.
However, rarely any trader around the globe is happy in making a 20% trading achievement. Therefore, for some traders, this will be just a question of meaning and focus.
Why are Forex Traders with Lower Leverage More Successful?
One of the main features of retail Forex trading is the relatively high leverage that the majority of Forex/CFDs brokerages offer, especially those relying outside the European Union (Australian traders can enjoy leverage on Forex as high as 500-1).
Numerous Forex brokers allow the traders to open accounts by depositing less than $100. So, multiple Forex traders will be able to deposit $50 and apply 400 to 1 leverage for gaining a trade of $20,000 size. So, the trader has the chance to either triple the deposits or wipe them out completely, leading to one more over-leveraged trade having similar results.
While logic can be found at work here- consecutive winning, the high leverage traders would deduce a way to make huge returns in theory instantly. So, all the odds against in the result of anything other than a blown account after some trades are fading away quickly.
The main factor for long-term profitability is worth mentioning here, that is lower the averages, the easier it is to control and minimize risks.
The risk issue can be best explained by the fact that if any trader falls more than 20% from the peak equity, then the chances of recouping with the loss become far and few in between. Precisely, losses of 20% require a regain of 25%, whereas losses of 50% need 100% profit back.
How Can I Become a Profitable Forex Trader?
1) Use Extremely Low or No Leverage
So, now we know from the evidence that odds are in search of better for you. Currently, 30% of the retail Forex traders are profitable. Factually, the percentage would be higher if all traders did not trade at overly high leverage.
So, the most critical step is to trade at very low leverage or no leverage at all. Practically, this means that never risk above 0.5% (ideally 0.25%) of your trading account on one trade. Greed will never help you in Forex trading. Never try to push Forex trading too far. Otherwise, it will start proving to become fruitless than fruitful.
2) Make a Significant Deposit
If your financial limits allow you to deposit as little as $100, it is excellent unless you don’t let greed come in between. So, you should know the value of the $100 for motivating yourself enough to trade profitably.
3) Make Use of Logical Trading Strategy
In Forex trading, never expect to make money right after you begin putting up trades. You will have to wait for the chances where you discover that the market is bringing the odds in your favor of long or short trades. Once you see the opportunity coming, take the trades according to your strategy. If you have no plan to recognize the opportunity, then you will be blind to the awaiting chances.
Factually, there is not much efficiency in the market, and the smart strategies increase profitability in the long-run for liquid markets, especially for major Forex currency pairs like USD/JPY and EUR/USD.
The most popular strategy that often works in the Forex market is the trading of breakouts to new 50-day lows or highs with the help of tight stop losers, and trailing takes profit on the above-mentioned major currency pairs. Furthermore, traders can also use pullback trading strategies for trading Forex currency pairs profitably when they are in an upward trend.
Usually, the range of Forex pairs goes up one day and is likely to fall the very next day. So profiting from this is tough. Hence, whenever you find that the price of the Forex pair is going nowhere, try trading the bounces from the range limits on short time frames. Make sure to use tight stops for increasing the reward to risk on all the winning trades.
You must be aware that the trading strategies based on fundamental analysis are less profitable in Forex. However, you can use the essential research for filtering trade signals effectively that comes from technical trading strategies.
4) Keep Following Your Trading Strategy and Be Consistent
If you think having a great and profitable trading strategy is enough, then you are wrong. You must be aware to execute the trend-following strategy the right way. Don’t lose hold of your emotions while trading. Remember that losing trade is part of your success unless you make small-sized trades.
Know that you will have more losing streaks than winning streaks while trading Forex. Paradoxically, you can expect profitability from Forex trading when you are well-prepared to avail meaning losses, even if they are temporary.
Also, consistency is the key to Forex trading as well. So never stop taking trades as this way, you might miss winners that could make a big difference to you.
Therefore, having complete control of your emotions is necessary; traders often get emotional, but the profitable traders are well aware of how to restrict their feelings from affecting their trades.
How Much Money Can You Make Trading Forex?
Well, the profits in Forex trading come irregularly. Thereby, you must view long-term performance as the most profitable performance while trading. Note that the profits are not guaranteed, but the profitable Forex traders are likely to outperform stock market benchmarks. Surprisingly, I have seen the best ways to change deposits of $10,000 to $1 million on Forex trading.
The Final Words
Forex trading is not profitable for most of the Forex traders, according to the research. However, if you are a retail Forex trader, then you can put the odds of profitability in your favor by using a low or no trading leverage.
Along with this, you must stake less amount on each trade and keep following your trading strategy to make winning trades. Also, don’t become impatient or greedy while trading on Forex.
FAQs:
Can you get rich by Forex trading?
Yes, you can. However, it is hard to become wealthy unless you begin with large deposits, as 70% of retail traders lose money in the long-run. So, outperforming the stock markets, for the traders, is a long-term realistic aim.
How much do Forex traders make every day?
Well, Forex traders might lose or win any amount of money every day without any worries, provided that the losses they come across are not huge. Forex trading is a long-term goal, so keeping the count of a single day trading outcomes is not relevant considering statistics.
Is trading Forex a great idea?
Yes, it can be! If you have enough capital and you trust yourself enough to follow a meaningful trading strategy in the long-term while minimizing risks, then it is a profitable investment.
