Is Forex indeed so risky? What am I missing?

Trading Discussion
1

Hi Guys and girls,

Sorry for the title, I had to draw some attention…:slight_smile:

After a long time I returned to Babypips and I have been back for a couple of weeks. I enjoy reading all the posts and the sometimes passionate discussions.

In the last weeks one question popped in my mind frequently and I’d like to share it with you to gain your opinions.

Against all better judgement I ask my self: Is Forex really a high risk investment?!

Hold on, hold on… I am sure I know your initial reaction, but in all honesty. Is it that risky, or did I became a hard knuckeled forex dealer in the last years, blinded by my own self confidence?

I just like to have your opinions, because I have some troubles with the common advises in the FX-world, like:

  1. Never risk more than 2% of your equity.
  2. 95% will fail.
  3. Brokers will take most of your money and cannot be relied up on.
  4. The market works against me and pips are stolen during news events.
  5. …

I don’t experience it in that way and I don’t consider myself reckless. I have a very risk orientated background and I learned to manage risks. My brains would go in a meltdown if I would do something that is too risky. So why isn’t it triggered by the FX-trading?

If we are so afraid of the things that can go wrong (and we forget that we already manage those risks) isn’t that the wrong attitude to enter the market? Would that not make us the nervous first term soldier that make rookie mistakes because he is scared of everything?

I think that we are even better than most of the big bank traders, at least the better than the traders I have met at the banks I worked for. I was surprised by their lack of knowledge and recklessness and my performance on eurusd was a lot better than most of them, but they just had more money.

Actually, do you know that most 90’s bank traders that went to trade for themselves busted their accounts? They were used to trade money from others and now they had to trade their own. They experienced that that required a whole different attitude which they had to acquire. We already working on that. Our own money is on the line and in my opinion that gives us one extra step ahead in the game. But we don’t read articles from retailtraders and their experience, no we read about those bank traders and the people around them. Would it make sense than to rely on their opinion alone?

I think yesterday I was given a link to an article about when to quite your job. I read it and I saw all cliches passing by and was actually happy to have reached the end of it. You probably experienceing that now, but I appreciate it if you stick to reading this…:slight_smile: Than I read something about the author! It was not even a trader, but a journalist that interviewed traders! He probably heared all the cliches we traders tell because we don’t want to sound like we don’t know our stuff and he just translate that as true traders knowledge and we pick that up again.

I am almost certain that there are more of us that don’t believe in the 2% rule, but you hear it so often that you repeat it. Just like saying ‘Goodmorning’ back to a person because you don’t want to be seen as a jerk. Well let me come out of the closet: I am a jerk as I trade 20% of my equity on each trade and I am 100:1 leveraged and I feel comfortable with it and it brought me good things in return!!! But I have to closely manage my trades, which I do, to manage the risks involved.

Anyway, it is less structured than intended, but these are my thoughts and I honestly like to hear your thoughts if you want to share these with me. Aren’t we missleading ourselves with the bias we are having, we are skilled and experienced!

Happy trading!

2

Anyone who sticks themself in a corner and doesn’t listen or try to think of opposing arguments might not be doomed to fail but I’d question the extent of their success. If you have an EXTREMELY accurate system that has performed well over the years risk what you want. But 20% does seem like a single mans risk or someone who has another job. As a means to support a family I could never do that. But if it works for you that’s freaking awesome. I hope someday I have a good enough system to do that on a side account.

3

Thank you for your opinion, I appreciate it. I hope you don’t mind asking. You triggered me with your remark and maybe you’d like to go a bit deeper on that. Do you question the common stigmas similar as you question the success of a man claiming to act differently? This is interesting to me to know a bit more about.

I know the 20% sound reckless…:slight_smile: But it is a fact, and ofcourse it is in line with the system used. I just think it is silly that I had my reservations in telling that because of the bias on the forum. Aren’t we too critical on ourselves? I am just trying to change the paradigm a little bit…:slight_smile:

4

It is worth noting that saying you use 20% of your equity is not the same thing as saying you risk 20%. You could do the former and still keep your risks very small.

5

Thank you for agreeing on that…:slight_smile: Peeps just seems to be focused on the ‘2%’ that any percentage >2% seems to be too much…:slight_smile:

Hmmm, the 20% seems to be distractive…:slight_smile: But appreciate your comment.

6

I like to question everything. Sometimes just to be empathetic not necessarily to change my views. I like to understand not just what others do but why. I find it interesting. Yes I do I don’t think 95% fail I think it’s high maybe closer to 80% on the low end. The risk would depend on many losses your system incurs in a row. Or how many you want it to stand up to. And I wasn’t questioning you I was commending you for questioning :smiley:

7

That is how I understood it…:slight_smile: I didn’t felt questioned…:slight_smile:

8

Brokers release their profitable account stats on a quarterly basis (at least US compliant brokers do). The numbers bounce a round quite a bit but between 30% and 40% of forex accounts are profitable during any given quarter. Also, the larger the account the greater the likelihood of profitability. That seems to imply, to me anyway, that newbie micro account holders tend to lose money and yank down the stats whereas people who actually know what they are doing and are serious about trading are not doomed to forex failure.

9

Have you seen actual stats for that? I’m not saying I disagree or anything. Just don’t think I’ve seen those numbers published and would be curious to do so (relates to my PhD research).

11

Ah, I agree on most of your points.
For instance, I’m pretty sure those stereotypes are stupid as they are unjustified :
3. Brokers will take most of your money and cannot be relied up on.
4. The market works against me and pips are stolen during news events.

Concerning the other two points :

  1. Never risk more than 2% of your equity.
  2. 95% will fail.
    I think these are just percentage, and should be considered that way. The fact that you have to limit your risk is true, because losing 2% and then wining 2% wont make you back to your initial amount, and the difference increase as the risk percentage increase.
    The second point has to be seen that way : 95% new traders will fail, but that’s not 95% of the current traders. It does make a huge difference, as it just means new traders are unprepared, and not that only 5% are winning.

A newbie trader.

12

has a real study ever been done stating that 95% of traders fail? i honestly think thats complete nonsense, but trading does lure in a lot of lazy people that want a lot of money for a minimal amount of work. the 95% statistic most likely refers to gamblers, adrenaline junkies, and get-rich-quick guys that get torn to shreds in the market and just bleed their bank accounts dry. as far as legitimate traders go, the ones that do the work and put in the hours, im sure that not nearly as many fail.

13

Yes, the breakdown by account size is included in the released stats. I just grabbed a random one as an example for FXCM from 2010 but they all track similarly (On a side note, Oanada is always at the top as far as having the largest percentage of profitable accounts for some reason – possibly because they use different metrix for reporting, have lower spreads or because competent traders naturally gravitate there – I have no idea why this is the case but it interesting).

Equity Range
Percent Profitable
$0 – $999
27.89%

$1,000 – $4,999
40.52%

$5,000 – $9,999
42.36%

$10,000+
47.74%

14

Yes. The 95% stat is pure fiction. US compliant brokers release their stats quarterly (see my previous two posts). The stats show that for even competent traders, forex is a very tough nut to crack. What is in the stats that isn’t reported is probably the most important though. Are the same accounts profitable month-to-month? Even though a majority of accounts lose money over the quarter are these short term traders and are the position traders mostly profitable? What percent increase/decrease in accounts take place? How long is the average trade duration? Stuff like that.

On the face, most people lose money in forex. That is all we know.

15

You wouldn’t happen to have a link (or links) to those reports, would you?

As for OANDA, I’ve always wondered if the fact they pay interest on account balances was a factor - though at current very low interest rates it’s hard to see that being a major influence.

16

I believe the percent profitability stats are now required to be included on the CFTC Risk Disclosure Statement for all brokers doing business in the U.S. I usually run across them at the bottom of each broker’s disclosure. Various sites on the web compile all the stats for easy viewing/comparison. Here are a few examples of the disclosures with the required stats (Scroll down each of the docs from the links to see the current profitability stats):

http://www.ibfx.com/Content/Forms/US/CftcRiskDisclosure.pdf

As far as the breakdown by account size, I may have been mistaken and those may have just been FXCM releases and not a mandated CFTC reporting requirement. I have seen Jason release the stats on various forums for FXCM and have recieved notices from them regading the stats. Seeing how the profitability stats are, to a large degree, uniform and remain somewhat consistent among brokers then it stands to reason that the account profitability by account sizes is also largely uniform. DailyFX has also done a number of articles showing the profitability of accounts is correlated to account size and amount of leverage used (here is one example: How Much Capital Should I Trade Forex With? | DailyFX ).

I also recall a study showing that taking advantage of the carry trade (holding long term currency pair positions) outperforms the S&P 500 which may lend support to long term traders doing better than intraday traders in forex and, by default, larger accounts (parking large sums of money in a currency with a high interest rate on low leverage makes sense – small sums of money using high leverage for long term trades is not possible, in my opinion).

I will try to track down some links later when I can remember where I ran across the info – now that I have further muddied the waters.

17

My apologies for the newbie question, but lets say I have a 200K balance and I am trading 2M. What would be the percent in equity I am trading 2% or 20%? I would refer to the baby pips school, but there is a lot of information there to find this one particular answer.

18

That is okay… 2% per trade would mean that your max loss is limited to 1K. If you trade 2M you would need leverage of 2000:1. You can’t find this. They advise (why, I don’t exactly know) 50:1, so with 1K you can trade approx. 50K in eurusd. Well also dependable on your base currency and price… but the point is is that it is less than 2M.

If you max loss is 20% and you have a 200:1 leverage, you would be able to trade 2M.

19

Yeah, finally some more reliable data… Thanks John!.. So roughly assumed, the more experienced traders and with higher equity have a far better change than just the 95%. We also missing the details on account busted and traders that will not return, but I guess the changes are higher than the common 5% (100% - 95% losers).

20

I think it was meant 95% of NEW traders that will fail. While I think the number is exaggerated, the real number is not too far off. Self-trading is a business, and like all other businesses, the percentage of business that can go bankrupt is high. In normal business, you usually have more than 1/3 of them go bankrupt in 2 years, and more than 1/2 go bankrupt in 4 years. So like any other businesses, Forex Trading is not an exception. There’re multiple reasons why a business fail, and it’s not necessary because of not making profit. Some reasons you can think of by applying from other businesses:

  • Bankrupt the account.
  • Can’t make enough money to support.
  • Have better outside jobs that can make more money.

New traders usually think forex is a golden egg, but I know some people that after trying it out, even though they can make money, it’s not really enough to support, or not as good as some normal jobs that they can do, so they quit. You can’t call those people a loser, but they indeed should be in the “95% of NEW traders that failed”

21

Thank you for your input. I understand what you mean. But we assume this… Thats my point… We reason stuff without knowing for sure and we act on it. Lets say that the 95% is true, are we still part of it? We educate ourselves, we ask for advice, etc… So is it still that risky for us? Perhaps we became beyond the point that our changes are more optimistic.

And the 95% that don’t make it are actually losers, because they lost their money…:wink: But to address your point (100% - 80% losers - 15% intentional quiters who made money but just wanted to stop).

And it is an golden egg. I am surprised that the money I made just cost me a bit more time than another hobby. It is quite simple to do (excluding emotions), but I believe we make it so hard for ourselves. I earn my money through Forex, and if I can do it everybody can do it, or at least 95% of the people…:slight_smile: