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Trading Tips

Responding to a Forex Rant

What you are about to read below came from a comment that someone left. The spam filter caught it, and likely with good reason given the lack of a real name associated with it. Basically, it’s a rant against trading forex. There are some legitimate points made, but also so errors. I figure it represents some common thinking about the forex market, so I thought it worth addressing.

Playing Forex can appear alluring, but the majority of people who try it lose money. All you have to do is do a web search on the words Forex and lose to see this is the consensus.Forex is what we call a zero sum game. You are making a bet with someone else about whether a currency will rise or fall. For every winner there has to be a loser. If you are smarter than the average player, you may make money. If you are dumber than the average player, you are likely to lose money. Most of the people making the bets in Forex are highly trained professionals at banks and other institutions. You are unlikely to beat them at this game.Actually Forex is not quite a zero sum game. It’s a slightly negative sum game as the Forex broker takes a small percentage each time in the spread. It’s a small amount but over a hundred trades, it ends up being a considerable amount of money. So the average player is likely to lose money, and remember the average player is a highly trained professional and probably smarter than you.There is a lot of luck in Forex, and if you play it, you will have some periods of time where you make money. This is usually because you are having a lucky streak, not because you have suddenly become an expert Forex player. However, most people are unwilling to admit their success is due to luck. They become convinced they have a system that works, and lose a lot of money trying to refine it.

There’s more to the original, but I think the point is made with what’s above. Let me address the main ideas.

Yes, forex is a zero sum market – negative sum when factoring in the bid/ask spread and commissions (where applicable). I’ve addressed forex as a zero sum game before, so I won’t delve into that again here.

No, it is not true that most forex traders are highly trained professionals. The latest US forex broker profitability figures indicate that there are something approaching 100,000 active trading accounts (meaning did at least one trade in the last 3 months). There is absolutely no way you can claim most of those folks are pros. In fact, it is unlikely more than a very small percentage of them could be considered professional. Most of those accounts are individual non-professional types. The pros generally don’t trade through retail brokerage accounts.

That said, it is definitely true that most traders lose money. The figures generally show that only about 1 in 3 traders are profitable in a given three month period. In a lot of ways, forex trading can be looked at in a similar way as a game like poker. In the short run chance plays a big part in the outcome, but over the long run those with a higher level of skill will take money from those with less skill.

By John

Author of The Essentials of Trading

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