The Forex world has a well-known statistic being passed around and there is a fair chance that you have come across it, probably many times. Basically, it says that ‘95% of traders in Forex lose money.’
This assertion may be a bit of a demotivator for traders who are following their dream of being a full time Forex trader, or at least attempting to achieve even part time trading success.
When 95 percent blow up their accounts, the figures show that you will also become one of the losses.
It’s not a very reassuring thought! What steps would you take in a world of struggling traders to become the minority that survives and make consistent Forex trading returns?
I want to investigate a few topics in this post. We will attempt to verify the assertion that ‘95% of Forex traders lose money.’ We will go through some supporting facts and try to determine whether this is just a term that is used for scare tactics, or whether it is really based on fact.
The Evidence that traders in Forex lose money
China forbids the selling of Forex margins
2008 stock market crash, Forex traders lose moneyAccording to a 2008 Reuters report, the China Banking Regulatory Commission prohibited banks from offering their customers Forex margin trading.
“Eighty to 90 percent of Forex trading players lose money, generally making a profit from it through banks providing the service, the banking regulator said.”
This is a valuable but far from definitive quote.
The profitability of traders of the day
An essay written by Douglas J. Jordan and J. was “The profitability of day traders” Published by David Diltz in the Financial Analysts Journal (Vol. 59, No. 6, Nov-Dec 2003).You will have to pay for it if you wish to read the full post, but the abstract reads as follows:
“In order to analyze the profitability of a sample of U.S. day traders, we used two separate methodologies. The findings indicate that almost twice as many day traders are losing money as they are making money. Around 20 per cent of traders on the sample day were more than moderately profitable. We have found evidence that day-trader profitability is linked to Nasdaq Composite Index movements.
All this really does is support our own views on day-to-day trade. It’s tougher and riskier than swing trading in the longer term. But, this is still not enough for the statistics to be nailed down as fact, so let’s move on…
The Speculator Skill Cross-Section: Evidence from Taiwan
The Cross-Section of Speculator Skill: Evidence from Taiwan” is a research paper on the Social Science Research Network published by Barber, Lee, Liu and Odean on 14 February 2011.”The performance of day traders over the 15-year period from 1992 to 2006 was evaluated using data from the Taiwanese Stock Exchange.
Particularly relevant is the following quote on page 13:
In an average year, 360,000 people are involved in day trading. While approximately 13% earn net fee profits in the typical year, the results of our analysis indicate that less than 2% of day traders (1,000 out of 360,000) are able to consistently outperform.
This is a very alarming figure, as only 2% of these traders have been consistently profitable. However, remember, under the microscope, this study only had day traders, and did not look at any other style of traders. Let’s look at some proof from the brokers themselves, which factors in a wider range of styles of trading.
U.S. Trading Commission Regulations for Commodity Futures
In October 2010, the U.S. Commodity Futures Trading Commission (CFTC) introduced new regulations forcing US brokers to reduce the amount of leverage that can be offered to customers (maximum limits are 50:1 on major currency pairs and 20:1 on other currency pairs).
US forex brokers are now also forced to disclose the percentage of truly profitable active forex accounts.
The data for the first quarter of 2011 was compiled by Michael Greenberg of Forex Magnates.
The Magnates chart informs us that the US brokers listed here reported that an average of ~25 percent of their ‘active’ accounts were in profit during the first quarter of 2011. This is a dramatic percentage increase that we have seen in the other reports we have covered previously. However, this knowledge is still not good enough to start base assumptions on which 95 percent of Forex traders lose money for the following reasons.
– Only a handful of US brokers are seen in the table. In fact, apart from Africa, the US has the smallest retail trading population.
– The collected data is only just from a period of 4 months, which is hardly anything.
– The information does not clarify whether withdrawals and deposits are taken into account.
-The data does not indicate whether these accounts are rising over time or are only ‘up’ from their previous 4 month figure.
– These successful accounts over their ‘high watermark line’ are reiterated on the last point, or have experienced a huge loss, but have recovered a small percentage within the 4 month timeframe, therefore called ‘in profit’
The new conditions for CFTC disclosure are definitely a step in the right direction towards greater Forex market transparency. However, for the following reasons we have just listed, it is important to treat the percentage figures of winning and losing accounts with a degree of skepticism.
All the brokers would be keen to show themselves in the best possible light, so if the numbers were subject to any manipulation, it would not be too shocking. This may encourage new customers to open accounts with them if a broker may claim to have a higher percentage of winning accounts than their rivals.
“It is important to remember that the data only includes “active” accounts (and various brokers can interpret the meaning of “active” differently). We have no idea how many new accounts erupted in the first few months of Forex trading and became “inactive” afterwards (and thus were omitted).
In particular, Oanda was guilty of some innovative accounting, with their Q3 2010 data showing that a remarkable 51% of accounts were profitable, 18% more than the nearest rival. However it turned out that included in their description of “active” accounts were accounts that contained no trading activity but had merely accrued interest on the account balance!
The CFTC put its foot down quickly and we see 6 months later that Oanda’s percentage of winning accounts has fallen to 38.1 percent.
These winning percentages are projected to decline even lower as transparency standards tighten in the future.
What conclusions can we make from the information?
Even with all the digging we’ve done, and all the proof we’ve sifted through, we still simply don’t have enough evidence to prove conclusively that ‘95% of Forex traders lose capital.’
One thing is for sure, for day traders, it doesn’t look fine. Basically, the proof is conclusive that only ~2% of day traders will actually turn a profit consistently. However, we know that day trading is a very stressful and tiring way of approaching the market. This is no surprise to us.
Day traders are forced to sit for hours on end in front of the computer, gazing at price charts while waiting for an opportunity for intraday trading to present itself. The majority of day trades are placed over a period of a few hours with the intention of being quickly on and off the market. I am not shocked that most Forex traders lose money, with so many retail Forex traders participating in scalping or day trading strategies.
This is a very mentally exhausting mix of high frequency trading and looking at charts all day. The majority of day traders struggle because their patience is wearing too thin. Out of boredom, exhaustion or annoyance, they start doing dumb things in the market. The core movements from the higher time frames are used by swing traders like us to take fast, longer term trades. Swing traders ride it much stressless fashion out the prevailing market path.
We don’t have to waste a lot of time in front of the charts by doing stuff like trading with the regular time system. This gives us the freedom to set up our companies, and not the pressure of hours of continuous supervision of them.
Although we have nothing 100 percent definitive to help ’95 percent of Forex traders lose money,’ it is very fair to say that ‘a’ high percentage of Forex traders lose money.’
In this article, all the anecdotal and hard evidence analyzed clearly indicates that Forex traders are losing money and that the vast majority of traders are not profitable. An exact percentage can not really be met, but we can see that the most optimistic estimate indicates that 87 percent of traders lose. So the soft quoted statistic of 95 percent might be a bit high, but it is fair to say that trading is NOT fast.