Is Forex trading as big a sucker idea as this quote says?

Beginner Questions
1

I got this information from the web. Basically it says that with so many traders, many of them professionals with big bank rolls, playing the markets, what are the odds that an amateur will, in the long run, even using the same techniques, NOT go bankrupt? The money quotes are in bold.

[I]Retail traders are - almost by definition - undercapitalized. Thus they are subject to the problem of gambler’s ruin. In a fair game (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first.[B] Since the retail speculator is effectively playing against the market as a whole - which has nearly infinite capital - he will almost certainly go bankrupt.[/B][/I]

Is this correct in principle?

[I]The retail trader always pays the bid/ask spread which makes his odds of winning less than those of a fair game. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade may be “resettled” each day, each time costing the full bid/ask spread.

According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) [B]"Even people running the trading shops warn clients against trying to time the market. ‘If 15% of day traders are profitable,’ says Drew Niv, chief executive of FXCM, ‘I’d be surprised.’[/B] "[/I]

Isn’t that what fundamental and technical analysis does - try to time the market? If the chief executie of FXCM is this down on day trading, wouldn’t it be foolish for an amateur to attempt it with real money?

It continues:

[I]Paul Belogour, the Managing Director of a Boston based retail forex trader, was quoted by the Financial Times as saying,[/I] [B]“Trading foreign exchange is an excellent way for investors to find out how tough the markets really are. But I say to customers: if this is money you have worked hard for � that you cannot afford to lose � never, never invest in foreign Exchange.”[/B]

Would appreciate feedback on this because it does make sense. Since the market is zero sum, aside from whatever monies the losers inject, for me to make money in the long run, wouldn’t it mean that I know something that the other traders don’t know? Would that mean that even some of the professionals are losing money? What percentage of the forex trading community is a retail amateur vs a professional?

2

Knowledge is part of the equation given that an experienced trader is going to outperform a newbie most of the time. Beyond that I don’t think it’s so much about knowledge as it is about effectiveness. There are plenty of folks who know quite a bit but can’t trade their way out of a paper bag.

Would that mean that even some of the professionals are losing money?

Absolutely given that the pros are mostly trading with an against each other.

What percentage of the forex trading community is a retail amateur vs a professional?

The pros are driving price, but amateurs are primarily trading against each other.

3

Retail traders are often times undercapitalized due to overleveraging. You’re not able to sustain a move against you because the position size traded is too large in relation to the balance.

I wholeheartedly believe in this as one of the most important lessons produced by BabyPips The Number One Reason Why Traders Fail in the Forex Currency Market

4

Jason, actually I read that quote differently. He is saying that the retail trader is undercapitalized, not because of any leverage, but because they don’t have the deep pockets of the major players. Even if you use no leverage, you have the disadvantage of being undercapitalized.

If the average trader is using basic trading methods as outlined here on babypips, then why would one trader make a profit while the other one loses?

My concern is that these figures from the FX world are basically telling us amateurs to not think about getting involved because the profits of the few big players are financed by the losses of us amateurs. What else could be financing them if not us? This is how I read it anyway.

5

In this business one’s loss is other’s win. I guess the trick for small traders is to ride with the big boys into a win, not play against them. :wink:

6

I think the reality is that in trading, with any instrument, it’s completely possible to start accruing gains on a regular basis. The downfall is that without proper risk management, the infamous “drawdown” can & will wipeout most players. The reason being is that they are ‘undercapitalized’ or ‘overleveraged’ which is arguably the same thing.

A story to clarify; The smack in the face which was the Pattern Day Trader Rule bothered me very much at first, when I first lusted after equities trading. “$25K !!! Who’s got that to spare!” I quickly realized that there were reasons for this (liquidity.)

Enter: Forex. $250, $25, $1 account minimums!!! Oh my!!!"

Sounds great… so long as you want your account to equal the proper risk for ONE trade!

Back to reality, if you can’t create a trade that only risks apx~ 1%-5% of your equity, which also factors in apx~ three times the daily[I](sub your timeframe of choice)[/I]volatility/ATR for a stop-loss, you’re going to be disappointed. You’ll be even more disappointed when you realize that even completing a hefty R/R trade only returns apx~ 3%-10% of your equity, not the 20%-100%'ers you were lusting after…

Honestly, I’ve found through crunching numbers, that unless you are a trading GOLIATH-SUPERMAN, you’re contract size (10K mini, 100K std) should at least be on par with your account size. BIG FAT E . G ; in order to use 2 lots on a trade your account should at least be $200,000 USD. [I](for daily charts, & if you use a lower timeframe be prepared to be frustrated with spikes)[/I] And the demographic which low account minimums have enticed towards the markets just aren’t filling their accounts that much… nor should they.

Trust me, you’ll do well for a few months(hours), maybe years(days)?? But those 10-20 consecutive losers will wipe you out both mentally & financially.

Mostly a rant, but if anyone wants to chime in to clarify, or call me out on my poor rhetorical skills, have at it!

:smiley:

7

Thanks Zeke and the other contributors. So if I have only $10,000 to start, I should trade in lots of no more than $10,000, using no leverage? If I used my whole $10000 and no leverage to buy that lot, wouldn’t I be wiped out a lot faster? How does leverage mitigate or exacerbate the fact that in order for the pros to win, the amateurs have to lose?

This is very confusing.

Question: When the banks move large amounts of money, are they doing it on speculation to make money, as we are, or do they do it for reasons other than speculation?

Pippy

8

Using your “whole $10,000” is a good way to look at it.

With common leverage, that would only “tie up” ~$100 of your actual account. As a result, you can trade many more contracts at a time, not necessarily to your advantage. Most reliable strategies will rely upon flexible position sizing, which in essence has an infinite amount of possibilities regarding the amount of (nano,micro,mini,std.) lots. Being limited to ONE lot every trade will severely limit your ability to trade adaptively, again, unless you’re very well capitilized…

I’ll let someone else chime in with some eloquence which I’m probably lacking at this time of night. :wink:

9

Here is a very simple money management “template”.

Limit your risk for each trade you take to 1% of your total account balance.

Do this by first deciding the placement of your stop, then calculating how many lots you can afford to trade with 1% of your account balance.

ie. You have a $10,000 account and you know that you can only spend $100 on your next trade. The EUR/USD presents a buying opportunity so you pick a swing low and put a stop below it, which happens to be 50 pips Below your desired entry price. You then take $100/(50 pips at $1 per pip)= 2 minilots (10,000units of currency).

Now as long as you understand that you can’t move the stop further away, you are very secure in the event that the price moves against you. Having a REASON for your stop placement helps keep you from moving it, because you simiply remember why you chose that spot in the first place.

BUT BE CAREFUL! 1% is a very safe amount to risk on a trade, but it doesn’t give you much wiggle room to place wide stops, ie. 100pips on a 4hr chart trade, unless you have an account of at least $10,000! If you can find a broker with microlots, you’d still need $1,000.

You can of course just risk a little more of your account, but then drawdown becomes your enemy. It can turn even small losing streaks into terrible pits to climb out of.

11

hi,

try trading on a demo account for a while. it costs nothing and it will give you the feel of how it is. experience first, then you will know what to ask. take a month or two on a demo and you will know the answers to [B]these[/B] questions. do’nt worry, you will then have other questions…

12

If you’re not employing leverage in forex then you will never be undercapitalized because you will always be able to make a trade or hold one for as long as you want (maybe not forever if you’ve got a negative carry position, but certainly for a long time). When was the last time you heard of a major currency going to zero value against other currencies? You haven’t. And since there are non-miniumum trade size brokers like Oanda capitalization will never be an excuse for losing money. There are plenty of others, of course.

If the average trader is using basic trading methods as outlined here on babypips, then why would one trader make a profit while the other one loses?

This question assumes that all traders are using the same methods in the correct manner on a consistent basis in the same timeframe. That’s about as far from reality as you can get.

My concern is that these figures from the FX world are basically telling us amateurs to not think about getting involved because the profits of the few big players are financed by the losses of us amateurs. What else could be financing them if not us? This is how I read it anyway.

The profits of the big traders mostly come at the expense of the big traders (some of whom hedgers not concerned about profitting). A very high percentage of retail forex trades never actually make it into the inter-bank market where the big boys play. They are offset internally by their brokers against others takiing the opposite positions.