Is it possible to invest and make money from trading in Forex?
You may have heard that the vast majority of retail forex traders are losing money. In this article, I examine the statistics reported by Forex brokers about client profitability under ESMA regulations, as well as research results on this topic, to answer the question about which traders lose or earn money on long-term Forex trading, and why. If you think you can put the odds to your advantage, review our list of our best forex brokers and consider opening an account.
You have probably heard that the majority of individual Forex traders lose money. In this article, I will examine the statistics announced by Forex brokers on the profitability of dealers according to the ESMA legislation, as well as the results of research on the topic, to answer the question if the long-term trader is losing or earning money and why. If you think you can put the odds in your favor, check out our list of the best Forex brokers and consider opening an account.
We have all heard the statistics that say 95%, 90%, or 80% of people who open accounts with a Forex / CFD broker lose their entire account within 6 months. Some people tend to believe this from the perspective of the Pareto principle, which says that 80% of profits are only realized by 20% of cases. Is there a way to know for sure whether any of these estimates are true? Yes, thanks to ESMA legislation in the European Union, which forces Forex / CFD brokers to clearly disclose on their websites the average loss or profit ratios for investors.
Some important conclusions that can be drawn from this dаta:
All the largest Forex / CFD brokers announce very similar data, and therefore it is reasonable to assume that about 70% of all individual CFD brokers lose and cannot make money.
These loss ratios are very similar among brokers, indicating that the market and the traders themselves, not the brokers, are responsible for the long-term losses of traders.
Although this data includes trading dealers in non-Forex products, there is no reason to believe that the results differ between dealers who trade forex and who trade in contracts other than forex.
Even individual Forex traders appear to be making more money than is widely believed, as traditional estimates indicating that 80% to 90% of people lose seem to be overrated.
Why 70% of individual Forex traders lose?
Now that we have found that for about 70% of the people trying, it is not possible to make money from Forex trading, we have to wonder why. In the end, if the markets are random as the “effective markets” hypothesis suggests, then shouldn't the winners and losers be divided by approximately 50-50?
The equal division between the winners and the losers may make sense if forex is a market that can be ultimately zeroed, as there must be a loser for everyone who gains and earns money, and vice versa. However, Forex / CFD trading is not zero-sum trading, it is a negative total trading because individual Forex traders:
They have to pay a difference and commission or their words in order to enter and exit trading.
They usually have to pay fees until the next morning for any open trade after 17:00 New York time.
This means that the odds are against the individual Forex / CFD trader.
However, it is not impossible to overcome these possibilities, as 30% of individual traders testify that they earn money.
A number of years ago, a large individual Forex broker published data showing two clear differences between winning and losing traders. Traders who:
They made higher deposits in their accounts.
Use less real leverage.
Their profitability was higher. We will examine each of these two factors in order, although they are related because traders who deposit less money tend to use higher leverage.
Why are traders with better capital more successful?
Forex traders, individuals who make larger deposits may be more inclined to deal with their trades seriously because they risk greater amounts, and they know internally that their chances of achieving greater profits are more chances to earn money as well. For example, a trader who deposits $ 100 with returns of $ 20 must be proud of himself as does a trader who deposits $ 10,000 and makes returns of $ 20,000, as it is the same achievement, with returns of 20%. So, to some extent, this may be just a matter of focus and meaning.
Why are Forex traders with less leverage more successful?
One of the characteristics of retail Forex trading is the relatively high leverage that many Forex / CFD brokers offer, especially those outside the European Union (Australia allows up to 500: 1 leverage). Many brokers also allow opening accounts with deposits less than $ 100. This means that many individual traders may open accounts with a deposit of just $ 50 and use the leverage of $ 400 to 1 to make a single trade of $ 20,000. This trading then either wipes out their account or multiplies it three times, which is more likely to lead to another trading with exaggerated leverage with a similar result. While there is some logic here, - since a series of profitable trades with high leverage will be a way to achieve massive returns and quick money profit in theory - the odds are against such gambling results in anything other than eliminating the account after a little bit of The trades are very small.
It is also worth remembering that less leverage makes it easier to control and reduce risk, which is a key factor in making money in the long run. This risk issue is best explained by the fact that when a trader loses 20% of the top of the balance, the situation begins to become much more difficult to compensate for these losses. A 20% loss requires a 25% profit, and a 50% loss requires a 100% profit.
How can I be a profitable Forex trader?
Use low leverage, or do not use the leverage
Now that we looked at the guide, the odds looked better for you. 30% of individual Forex traders are winners, and this number will surely be much higher if it does not include all traders who use very high leverage. So, the first thing you can do is use very low leverage or not even use leverage. In practical terms, this means not risking more than 0.5% (ideally 0.25%) from your account in one trade. Do not allow the pursuit of money to make you greedy, in Forex trading, this is counter-productive.
Make a good deposit
If you can only deposit 100 dollars, that's fine, but you have to respect that amount without being greedy. If $ 100 doesn't mean much to you, then you will almost certainly not be enthusiastic enough to trade it well.
Use a realistic trading strategy
You cannot expect to start placing trades and earn money right away. You need to wait for opportunities where you think the market places the odds in favor of a buy or sell trade and then trade according to your plan. If you do not have a strategy to identify these opportunities, you will be groping in the dark.
It has been well proven that the markets are ineffective and that the strategies that follow the trend if carefully implemented, enable you to make money profit in the long run in liquid markets, which include major currency pairs in Forex for example EUR / USD and USD / JPY. One of the strategies that have worked best in the Forex market over recent decades is to trade breakouts to new 50-day highs or lows on these two major pairs, using relatively narrow stop-loss orders and a type of profit-taking-up. Falling trading strategies can also be used to profitably trade Forex currency pairs when in strong positions.
Most of the time, forex pairs range: if the price goes up one day, it is likely to go down the next day. It is difficult to take advantage of this, but when it appears clear that the price of the forex pair is nowhere to reach, you may try to trade bounces from range limits on short timeframes, using narrow stops to increase the reward rate for risk-taking trades that make money.
It can be said that trading strategies that rely on fundamental analysis are less successful in Forex, but basic analysis can be used to effectively filter the trading entry signals generated by technical trading strategies.
Follow your trading strategy and be consistent
Having a good and profitable trading strategy will not help you to use any money unless you implement it correctly. It is important not to be depressed or people frustrated by losing trades - remember, part of the plan is to have some losing trades, which is not a big deal as long as you keep small individual volumes. You should expect loss periods, which you will compensate for more than winning and earning money periods. However, you should be consistent, that if you stop doing trades, you will likely miss the winning trades that would have made the difference.
It's important to control your emotions - most traders become emotional, but winning traders find a way to prevent their emotions from destroying trading execution.