Forex broker profitability figures likely overstate trader performance

A couple weeks ago I began a discussion of retail forex trader profitability with my post Starting to detail forex profitability data, which generated some meaningful exchanges in places like (Trade2Win, FXStreet, and BabyPips). That post was really the tip of the iceberg, however. I am going to continue to post on the subject moving forward as my PhD research unveils new, interesting and useful information. To that end, I want to expand on my first post.

The quarterly profitability figures reported to the CFTC by the US forex brokers are meant to provide a degree of transparency to prospective (and current) traders. As I noted before, however, they are extremely limited and don’t really do a good job of telling the story of trader profitability. They may, in fact, provide a distorted view of reality to those who don’t understand them properly. I previously looked at the rate at which profitable quarters were seen coming back-to-back – the degree of consistency in performance. To put it briefly, there isn’t much.

The data I used in that analysis was based on active brokerage accounts, just as the CFTC-reported data is also based on active accounts (defined as those doing at least 1 trade in a given quarter). Here’s the thing, though. Some traders have multiple accounts. This is not the majority of traders by any stretch of the imagination, but to the extent that these multiple accounts are active they can potentially influence the broker profitability figures.

That being the case, I re-ran my analysis using trader performance rather than account performance measurement. In the chart below I’ve differentiated the results from my data between the initial view based on accounts and the new one based on individuals, which aggregates all the accounts held by one person into a single reading.

You will notice that in all cases there is a noticeable drop between the By Accounts and By Traders figures. This tends to suggest that the best performing traders run multiple (profitable) accounts, which is interesting in and of itself. I’ll likely follow up on that tidbit later.

More importantly, though, it suggests the broker-reported figures may overstate actual trader profitability rates by at least a small degree. In my data there are nearly 5900 traders who have done trades in almost 8500 accounts. This likely represents an overstatement of how many accounts traders run, however, as sub-accounts for at least one major broker are each treated as separate accounts in my data set and are not likely done so in the CFTC-reported figures (though confirmation of that would be worthwhile). As a result, a shift from account-based metrics to trader-based metrics may not show as much of a variance as seen in my own data. Still, the broker figures do potentially overstate things a bit.

Something else to think about is the impact of copy/mirror/social trading. My data has specifically excluded it where such activity could be identified (which is a lot). I’m studying individual trader performance, after all. Those trades automatically be copied from someone else don’t really further my research. If, however, traders are having profitable trader trades copied in their accounts (which hopefully is the case if they are engaging in social trading) then this also will tend to skew the CFTC-reported profitability figures positively, overstating the performance of traders who actually make their own decisions.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.

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