you mention in your profile that you are a professional trader. So you should have knowledge about realistic expectations in each asset class and also know the specific characteristics of each of them. The topic is far to broad to give you a reasonable general answer.
Why the group of consistently profitable retail traders must be close to zero in the long run and their maximal gains are limited
Hanover, to be more specific, here are my thoughts:
whether the small minority who show as profitable do so because of some kind of proficiency; or merely fortuitously
Market models based on random price models can simulate the forex market quite close to what retail forex statistics show in reality. While the paper from Davidson listed a few posts earlier explains quite well how much winners can be attributed basically to luck only, it can't rule out the existence of a small group profitable because of proficiency. This is simply not possible using such an approach. However, broker do have this information, but won’t publish it ever, because the results would be a nightmare for their sales and marketing departments to gain new customers…. ;-).
To observers who don't understand how price is being moved, naturally the effect will appear random. The question is to what extent the heavyweights who seek to manipulate price are able to obfuscate the effects. Certainly the retail trader is at an informational disadvantage, but you haven't presented evidence proving that the manipulation doesn't occasionally leave a potentially discernable footprint.
It's also my understanding that the greater spot FX market includes large volumes of orders placed by entities whose agenda is neither speculation nor to exploit smaller traders. Re your comments on market makers.
I agree on the following points:
Manipulations – (or temporary inefficient price behavior) - occur and they leave footprints. There are legal and illegal motives behind such moves. Retail traders always have an informational disadvantage in these situations. They can't identify footprints before they occur, they have to identify footprints based on price and order book data. In relation to the initiating manipulator behind such a move, even the smartest retailers are always late. They can only potentially front run less skilled participants or those with no speculative intent or profit from those that are overleveraged or do typical newbie’s mistakes around such moves, but will lose against the manipulator in the long run, because they react on price changes he initiated and at least controls with a probability > 50%. Prediction of future manipulations is a very difficult business and the manipulator has a very big interest to make his manipulations unpredictable over time….. if he doesn’t, it’s clear what a highly efficient market will do with him short term.
I've read that genuine MMs take measures aimed at driving price toward large liquidity pools, which is how they maximize their gains, and that savvy traders can potentially use this information to their advantage.
I also agree on what MMs do to maximize participation, transaction volume and therefore profits, but again the window for the savvy trader is small and trading costs (spread, volume com, slippage) will be of great importance in such an approach. Overall, the MMs must make money against the all other participants combined; otherwise he loses his incentives to make a market and has to increase the spreads to compensate for it. I think the very little spreads in forex are a good indicator how efficient this market is on the top level and why random price models therefore work so well to simulate it.
But even more significantly, my understanding is that retail consists of only 2%-10% (depending on which source you read) of total transacted volume, and that much of it gets netted out, or otherwise resolved, before orders even reach the interbank market -- see the diagrams here.(Therefore non-retail players are necessarily dependent upon each other for the provision of liquidity, to a great extent). It also follows that the retail trader's main adversary is his own (possibly unscrupulous) broker, who offers a composite of multiple price feeds from the greater market, and can potentially manipulate this as he pleases. Hence the efficiency (or any lack of) of the 'real' market effectively gets passed through another significant filter before it reaches the retail sector. Your argument for efficiency is therefore, at best, over-simplified, and at worst, remains a theoretical assumption that you haven't really substantiated.
If you trade with a broker that acts as retail level market maker (bucket shop), takes your trades in his own book and carries the counterparty risk, probably even uses a VDP or outsources all dirty tricks to a premium liquidity provider he secretly controls to hide his true intentions, you are trading at such a disadvantage that there is really no reason to discuss profitability at retail level at all. I think the "profitable group based on proficiency" knows would know that trading costs are essential in the long run, since consistent edges can only be based on small lasting inefficiencies of other participants.
All the inefficiency that occurs on broker level will work against you by design. While the quarterly retail statistics from CFTC do not give a real picture about retail profitability in the long run, they do... give a hint which broker offers a fairer trading environment....and look at these huge differences between brokers just within 3 months.
The same is true for (all) other inefficiencies that occur over all time frames and sizes. These inefficiencies typically work against the retail traders, because these are caused and controlled by other types of market participants and are nothing else than there specific edges and motivations to participate in this market.
If p.e. an important news release hits a currency pair with a true fundamental impact on price....this information will cause temporary inefficiencies that also work against a retail trader, because other market participants will have an information edge in such a situation. Insider trading laws do nothing else than minimize that edge and make the market more efficient and fairer for all participants, but they never ever can eliminate that completely. You can extrapolate the same logic on all other potential edges of all other market participants and finally come to conclusion that as a retail trader you really are at the very end of the food chain and the pool from which you can take is small and you share that pool with far bigger sharks always looking for ways to catch you too while you hunt easy prey.
Your right, all this isn't a definitive proof that there is not one single person that is consistently profitable on the retail level. But it is a very good argumentation base why even for the most successful retail trader on earth the universal, ingrained in the market structure, truth is that the risk adjusted profits he can make in the long run based on a consistent edge have to be small and will even become smaller over time. This model and conclusion does so far fit perfectly with what I have seen on retail level trading based on price and order book information. All hard facts show this is discribes the reality pretty well.
If you start to use non conventional, non public data where you can find a statistically proven and relevant edge trading a specific instrument.... I don't consider you to be a retail trader anymore..... you switch into another group of market participants (Quants, Hedgefonds….) and the proficiency, resources and money required to do so successfully is on a totally other level. But even on this level competition is hard and each edge theoretically must wear off over time. That is the core principle of an efficient market. So it all comes down to an arms race based on technology (speed, real time data gathering, new ways in gathering relevant date, etc), data analysis capability (data mining, machine learning, AI, etc) and the ability to generate new trading ideas (talented humans) that havn't been addressed so far. Isn’t that exactly what currently happens out there? These trends should make markets even more effective in the future and further suppress volatility and spreads, beside intentionally induce volatility used by an other group of market participants... Counterintuitive tail risks will remain or become even more relevant in the long run, because the more “efficient” a market becomes, the less speculative returns it offers. Since average human beings are greedy and stupid, they compensate with leverage till markets become fragile and creative destruction moves in finally..
I pretty clearly explained my way of thinking…..it will never be static and always adapt to new facts, but regarding retail forex I do not expect to change my mind any time soon. I think sceptics like Mingary and myself have proven in great detail that what we say is certainly true for 98% of all retail traders..... I can live with the fact that I am only 98% correct with my statement that "retail forex is a negative sum game for losers".
Two further steps of regulators towards lower leverage....
Japanese Regulator Discussing Retail Forex Leverage Cap at 1:10
6 Nov 2017, Tokyo, Japan - Finance Magnates - The discussions are still ongoing and include only OTC forex brokers. The Japanese financial regulator is discussing a new proposal that is aiming to limit retail forex leverage, Finance Magnates can confirm. Multiple sources from the Japanese industry are expressing worry about the prospective impact on the market.
They probably mean 10:1..... 1:10 would be a bit aggressive.... :-)
Poland Backtracking on Plans to Reduce Maximum FX and CFD Trading Leverage to 25:1
31 Oct 2017, Warsaw, Poland - LeapRate - LeapRate has learned from sources in Poland that the country's Ministry of Finance has decided to delay its plans to further limit the Retail FX and CFDs sector in the country. Poland was one of the first EU countries to rein in Retail FX trading, passing a law in July 2015 which set maximum leverage for Retail FX positions at 100x (or conversely, requiring margin of 1% on all positions).
Sorry, I wasn't following this thread and I didn't see your post until just now. To keep my response brief, and avoid repeating material unnecessarily, I'll simply pick a few of your points and comment on them.
Update on the regulation front:
If this works out, the retail forex brokers will be at the receiving end this time.... Things are moving in the right direction....finally.
Update on retail forex growth in the US in Dec 2017.....
there isnt any.............. the total amount of retail forex obligations shrinks at all 4 brokers....
A good thing to see that they are slowly running out of new victims.......aka new retail traders.
and by the way.....FCA and ESMA are on the way to limit max leverage....
50:1 and 30:1 would be still far too much, but a step in the right direction.....additional 4 steps in this direction and the goal will be reached finally.
An on the marketing front....
Facebook stops adds related to binary options and retail forex....
Moreover, the FX market did not completely evade the government’s backlash. Due to mounting pressures from Chinese authorities, the country’s search engine Baidu, has officially banned FX ads. As part of its efforts, Baidu has linked FX keywords to a disclaimer, that now informs users to seek “legal alternatives to leveraged FX trading.”
Together with the ongoing crash in cryptos the fx brokers will hopefully face a dire future.....I think they deserve it, because their business models are rotten to the core.
There is no argument on the ground that forex trader should be disciplined and well planned in order to carrying out trading activities appropriately. A round o clock market does not mean that traders will trade 24 hours rather it means that a trader will overview the market on a regular basis and conduct proper due diligences and he will trade at his best time. But the losers who lack proper trading skills and proficiency about the nature of forex trading can try to engage in all trades and overtrading can force them to withdraw them from the market due to significant losses. For the losers, forex is a zero sum game.
HudithePfupf speaks so much sense, and backs up his statements with facts, retail traders should pay attention.
HudithePfupf, retail fx is not biggest problem in economy. its huge endless rotten tomato field.
I still need retail brokers and not want them die. They need at least 1:100 leverage. I don't.
Without retail brokers, my trading would be harder, i trade 24 pairs, and i cant get all those from CME, where scaling and commissions are heavier.
Why you use so much energy trying to tell people dont try to climb mount everest wearing bikini's and not have skills of sherba.
they learn or not.
There are many more important issues, which are not related peoples creed. why not help them.
You are spot on Hudithepfupf Retail forex prays on everyone. But I would sh*t a brick if it went away so I guess I need them to stay in business with their current business model.
Watch the two videos with a sports bookie in mind. Think of yourself as a bookie and you have 10 clients who are just horrible. They are the worst of the worst and lose money always. What would you do?
1. Always take their bets, never smooth them out with other bookies to smooth out risk (Full 100% profit)
2. Once you see their bets-you contact another bookie to place a bet in the opposite direction (Add onto the profit)
3. Move the line a tad to encourage your other clients to bet the same as your 10 degenerate (Add onto the profit)
Obviously a day or weekend can go against you but in the long run the 10% vig and the skill of those 10 clients will make you a winner at the end of every period of time.
I'm sure most have seen these videos from Anton but for those that haven't
Well part of the problem lies with us retail traders too. We are willing to part with our money on the prospect of untold riches. We are the ones who create that demand for retail brokerage.
I mean, if there is free cash lying on the roadside, surely anyone would pick it up right?
How about central banks fractional monetary policy ?
How much banks need own money.
Money printing. Quantitative easing, last year 1.5 trillion.
Huge losses of banks playing in financial markets, and not doing they own core bussines,and when do, giving loans to countries which dont have good credit ratings, after loss socializing citizens money, when should go bankcupt.
Do Volker rule works.
How about paper gold trades.
Eu not follow they own rules, who can be member of EMU.
retail forex problems is just flake of snow, in Antarctica. how goverments,politics and banks are stealing citizens money. they "scam/fiddle" more money than forex retail industry.
If people dont know what they are doing in forex or they life, its they problem, if someone is driving without seat belt, its they problem not mine, and why have to penalize all drivers. that every driver have to drive 10 miles per hour in highway.
Do retail traders lose because of broker costs (spread, commission, slippage,.....), or because they make bad trading decisions? Costs can't be avoided, but bad trading decisions are reversible. If it's possible to trade badly, then it's possible to trade well, and if it's possible to trade well to the point that costs are exceeded, then it's possible to make a systematic income. (And if it's possible to make a systematic income, then forex is not being falsely promoted by brokers).
Of course it's true that, everything else being equal, costs make trading a negative expectancy game. But such a statement ignores the possibility that costs can potentially be exceeded by proficient trading.
All of the above is predicated by another question: are markets a completely random walk? By "random walk", I mean that there is exactly 50% probability of an uptick, and therefore 50% probability of a downtick, at EVERY point in time. Because if it is a random walk, then there's no such thing as 'good' or 'bad' trading decisions, because all decisions are effectively made irrelevant by the randomness, and EVERY 'strategy' will eventually be beaten by costs. But if it's not always a random walk, then it follows that biases occasionally exist, that are potentially exploitable. And once again, if these are exploitable to the point that costs can be exceeded, then it's possible to make a systematic income.
Statistics show that the vast majority of retail traders lose. No argument there. But to those who see the glass as being half full, it doesn't matter whether the failure rate is 90%, or 99%, or 99.9999%. Because, conversely, if there is just ONE retail trader making a systematic income, then it's possible for others to make the same decisions and therefore emulate his success, assuming that the markets (being pseudo zero sum) are large enough to accommodate all of them.
And of course all of the above assumes that it's possible to find a broker that doesn't cheat you, a genuine STP broker who simply passes your orders onto the greater market without interference. There needs to be only ONE such broker.
Those are the key questions and requirements, as I see them. Just as in all walks of life, losers will always find a reason to whine; winners will find a way to succeed, if and where it's at all possible.
to bite cost, traders trades higher time frames such as 4H or daily etc. thus force them to make less profit due to longer trade duration, this makes those traders trade garbage instruments to increase profit or they simply increase size n then MC
am sure u already acknowledge that there is no losing code that can be made profitable by just reversing d trades. means, d losing code can be profitable by just reversing d outputs but not possible. coz d real reason isnt d algo its d cost loser so it wont work in both directions just because of costs
Maybe someone has mentioned this on the thread already but here is a comment:
You CAN have a system that looks terrible work by just switching the sides. However/BUT, and this is a big but: your holding period for trades and transactions needs to be longer. IE if you are trying to open and close by the minute, the transaction costs like spread etc will eat you alive regardless of how it does.
My opinion is most should lengthen their time frames to be hours and days, and then can and will see more success beyond randomness. In my opinion lost retail loses because they want it fast and instant and they want to intraday trade with certainty. Good luck with that in my opinionn... Haha maybe I'm just not good enough to do it but...?
And personally I'd say systems should seek to find short term dislocations on long term value using some kind of reliable longer term trend indicator but that part might just be me. I'd also say to have a system strongly grounded innreality, IE the long term trend part I recommended. I personally refuse to run black box things or anything that is not just an automation of a common sense concept.
In my opinion, almost all retailers try to over trade and force their stuff on the market and it just does not work that way I'm/from what I've seen. Many also seem to find some black box crap that is not grounded in reality but tests really well, then start to run it and the "distribution" or market shifts and they get toasted. Haha.
The paradox of doing less and controlling ones actions to get more?
Kind Regards, Tzamo
The main reason why you simply cannot reverse your trade logic on a losing strategy to achieve a winning one is that the frictional costs of trading have a far greater edge than your actual trading strategy. What we need to understand is that an edge in an efficient market is typically very small. Arbitrage opportunities are quickly devoured by market participants.
Many of us confuse a random outcome with an outcome that exhibits non-random drift. This is very easy to do. There is no certainty in this game and what appears to be a sustainable equity curve can quickly evaporate simply by virtue of how its composite return distributions line up. There is never any certainty in this game apart from the general premise that a larger sample size is more likely to reflect the general performance metrics of your system. Those that can survive long enough across a diverse range of market conditions to experience a large sample size with a solid reduced risk weighting performance return may be fortunate enough to think their strategy displays an edge.....but once again....no guarantees.
Like compound interest, a sustainable long term strategy with an edge works on the principle of magnifying this very small edge through risk adjusted position sizing and increasing trade frequency. This is seldom achieved on a single market as actual non-random market behaviour is:....well....unpredictable in nature. Complex markets offer complex solutions. Your strategy needs to have degrees of freedom to survive the complexity. Simple strategies are what is required but to most traders...the fruits of these simple strategies are not attractive lures.....and this is where the trap of curve fitting emerges.
Recognize the small edge...if any..... that you are working with. If you could perfectly predict the market then you would place a trade with precision with no requirement for stops. Your solution would have almost infinite yield. The reality is that an efficient market only delivers fleeting non-random opportunities. It is our job as traders to identify and pounce on these opportunities......but to sort out the non-random from the random is where a definitive edge is borne.
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