Between 2009 and 2012, nine out of ten private clients lost money trading forex
The Autorité des Marchés Financiers (AMF), an organization that regulates participants and products in France’s financial markets, embarked on a study to assess the efficacy of trading by individuals in the foreign exchange (forex) markets.
The decision was triggered by the growing number of complaints from clients and the appearance of fraudulent and misleading advertisements that lured average Joe traders into online forex trading with the promise of huge and instant returns, but downplayed the risk. Many of the online sites were illegal, unregulated and unauthorised.
“The serious façades of some websites may actually be hiding frauds,” cautions the AMF. “Using impressive marketing, these firms steal the money of clients who find they have limited or no recourse due to the location of fraudsters, who are usually abroad.”
The AMF has been at the forefront to inform, warn and educate the public – actions take include publishing online lists of questionable websites, collaborating with legal authorities, and conducting audits and investigations at some firms.
Retail forex traders taking it on the chin
The results of the study, as summarized in the infographic below, are an eye-opener and led the AMF to warn individual investors of the dangers of forex market trading.
With nine out of ten retail traders losing money, the study appears to confirm the old adage that 95% of day traders are unprofitable.
The gain loss ratio (+13.8m vs -175m) is a sobering statistic that indicates individual traders are gambling more than they are trading.
Self-defeating, repetitive behavior
While the statistics above are though-provoking enough, the study came to another disturbing conclusion:
“In addition to the great majority of losing clients and the losses suffered, the study shed light on a behavioral phenomenon: individual investors learn little over time,” says the AMF. “Indeed, it appears that the most active and regular investors see their losses mount over time.”
What is it then that still attracts small investors to forex?
Usually, it is the lure of easy money, the boredom from a regular job, and the amphetamine boost from the occasional winning trade. These traders fail to realize that trading is as serious an occupation as any other, and not to be taken lightly.
The usual pitfalls and what to do
Retail traders are commonly unprepared for the challenges of trading, particularly forex.
The most widespread reason they end up destroying their trading account is the incorrect use of the huge leverage provided by forex brokers. The leverage magnifies gains, but unfortunately it works both ways, and losses can be large enough to wipe out the trader’s capital in the matter of a few trades. These traders go for the big hit over the fence, not knowing that trading is all about building up capital, slowly and steadily, with safe singles.
The average trader also does not have the patience to invest in an education. If you think you can go out there playing the Lone Ranger on a terminal and make as much an MBA who spent $250,000 and four years on his degree – without preparing for it – think again! Spend a year reading up on trading psychology, economics, markets, technical analysis, everything – and then spend a year demo trading.
The free, unlimited demo accounts that brokers provide are one of the best features of the forex market. Most of these demo accounts allow the novice trader to generate a report that contains excellent statistics on the trading activity. More often than not the report is a wake-up call, with the trader thanking his lucky stars it was not a real $50,000 account.
Serious traders maintain a journal of their trading – to learn from their mistakes – but the amateur will usually procrastinate over the post-mortem. This is an essential learning process in the evolution as a successful trader, but in its absence, the mistakes will likely repeat again – a point made by the AMF too.
Above all, traders must learn to recognize and fear risk, and build it into their trading by position sizing, stop losses and assessment of risk-reward ratios. Know what? This last point is all about being humble before the all-powerful market: “Rule # 1 = Never lose money; Rule # 2 = don’t forget Rule # 1.”
So, if you want to trade forex, do so, but work to keep the odds in your favour.
[Image of forex symbols (inside infographic) attributed to "Forex" by RedHotHeat - Own work. Licensed under Public domain via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Forex.svg#mediaviewer/File:Forex.svg]
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