“Hello Igrok,
I would like to know one statistic result. How many traders lose money in Forex? Is it really 90% - 95% ?”
I guess someone else might be interested in the info as well. So, I’m posting it here now. This is my article written about the issue long time ago and also posted on my amazon blog:
“Have just found an old laptop with some actual statistics provided to me by a couple of some major international FX dealing companies back a few years ago. The data was extracted directly from their back office systems and is accompanied by a bunch of their own analysis and comments. I guess some of these numbers could be of interest to public.
But first, just a few words about how retail FX business works. Usually, when I was asking my students if they know how dealers make their money the answer was always the same: “On dealing spreads. The difference between bid and ask is what a dealer usually puts in his pocket.” Such naïve belief still persists among the general population of retail FX market traders.
In fact, this business works quite differently. Because cash currency market in its origin is an interbank market it operates in large contracts. Much larger than the contracts traded by an average retail customer. Because of that, the companies providing services to retail clients have no other choice but to bucket small positions of their customers inside the house. Some of such client’s positions are becoming offset by one another but obviously not all of them. When the general sentiment about market’s direction is particularly strong among small-size traders then the total number of open longs and shorts becomes largely disproportional and shifted one way or another. When the “bucket” becomes “too big to carry” the dealer passes it into the market covering house’s exposure. However, because only a couple of percent of traders are actually making money in the Forex market over a longer time, such statistics provides dealer with pretty good opportunity to make a lot of money just keeping their clients’ positions inside the house for as long as possible. In this case a dealing company business is little different than a business of Las Vegas style casino where every customer is betting against the house. In our case it is virtually the same and client’s losses become dealer’s profits and vise versa.
Some of the dealers, especially those with deeper pockets and consolidated management routinely carry very large exposures on daily by betting against their customers. Some of them routinely carry inside the house an exposure in excess of hundreds of mio. USD.
In order to prevent some unnecessary risks and to get some protection from possible bankruptcy if the things go ugly for a dealer, every dealing company has some guidelines and internal policy with the idea of limiting their risks.
Here is what they usually do:
- Limit their exposure to a certain size. After reaching the preset limit, the position gets covered in the market or hedged. Customers with large capitals and big trades are also treated differently than the rest of the clientele.
- They also make customers’ profiling. They filter out those clients that could potentially beat the odds and trade profitably. So, they don’t bucket such customers and usually immediately pass their contract to a larger counterpart like the clearinghouse or another bank. Sometimes even to another dealer. The rest of the customers with lack of brains or a lack of experience and relatively small trading capital get bucketed inside the house.
I remember myself trading through a major Europe based dealer, which began to cover all of our positions only after paying us a few mio USD of trading profits out of his own pocket in a couple of month trading period. Then they even established a dedicated telephone line for our two-way communications and greatly improved their services since.
So, here is some approximate statistics for “A Dealer vs. a Trader casino style game” from the dealer’s point of view, which I believe should be true for the industry in general. (Over 24-month period)
Winning months – 15. Losing months – 9.
- Total annual profit – 63% (of the total amount of all the customers’ funds in trade).
- Average monthly profit – 5%.
- Max monthly gain – 37%.
- Max monthly loss – 10%
- Total customers’ loss (USD) – 41 mio. Average customer monthly loss – 1,8 mio.
- Roughly 40-50% of customers’ losses can be attributed to spreads and slippages.
- Average “life expectancy” for an active individual trader without him adding more funds into the account ~ 2 months.
There could also be some dirty tricks that some of the dealers practice for increasing their profits and minimizing the risks. Some of the most common are:
- Skewing quotes away from the real market price. Usually shifting them in the direction of the immediate trend. (Doesn’t happen with the most reputable dealers nowadays)
- Executing stops before the market has reached them or outside actual trading range. (Pretty common for small “bucket-shops”).
- Suddenly increase dealing spreads to hit the stops or do not execute limits even if the market has traded there. (Happens sometimes even with reputable dealers. Limits execution problem is my most frequent problem that I have to deal with on a regular basis).
- Executing stops with unreasonably large slippages. (To me happens mostly only if trading large contracts. Even with banks).
- Canceling executed trades. (Have never seen it personally but have seen lots of reports from others).
- Re-quoting market orders in a slow market for a worse price. (Extremely common practice on all levels).
- Constantly re-quoting every order in the fast market without offering an alternative price and thus not allowing making a trade at all. (Only those dealers whose trading platform is intentionally programmed to perform such a trick).
- Disconnecting internet-based trading platform at the moments of increased market volatility or just freezing it for a while. (Usually, right before or during a major economic news release) (Normal practice for smaller “ bucket-shops” but now also becomes relatively popular among larger guys too).
Sometimes “honest mistakes” also take place, but since the dealers usually (if everJ) not very eager to admit them, it might also cause some major headache. The most common “honest mistake” (especially if trading on the phone) that I have seen over the years of my professional trading career would be a wrong quotation that is traditionally equal to one big figure. Normally, a very fast market is the one to blame. I saw it several times to happen but only once got actually caught into it. That time it initially cost my client a few hundred grand of unrealized profit in just a matter of seconds. Fortunately, the dispute was settled to everyone’s satisfaction after a couple of weeks of fierce arguments."
