FXCM Discuss Why Many Forex Traders Lose Money

Following the recent release of their forex trader profitability statistics, Jason Rogers of FXCM has written a guest post for us on the topic of the moment – "Why have traders been unprofitable"

FXCM is proud of our agency model using No Dealing Desk execution and it means traders are trading in a fair and transparent market without their broker playing games.  Because of this traders don’t have to deal with requotes, dealer intervention, or restrictions on stops, limits, and entry orders which a dealing desk uses to protect their interests over the traders interests.

While NDD provides what we believe is a more transparent trading experience, NDD cannot help traders pick the correct market direction.  It is not a signal generator telling you when to buy and sell and in what direction.  What it will ensure is that when you want to enter or exit trades, you won’t have to play games with your brokers dealing desk.

Why have traders been unprofitable?

FXCM actually shows you why the majority of retail traders have been unprofitable in the Speculative Sentiment Index (SSI).  SSI shows net positioning of retail traders for the major currency pairs.  This means it will display how many long positions there are compared to short positions.

It’s no secret that retail traders like to trade against the market trend, attempting to pick tops and bottoms.  In ranging market conditions, this works well.  When the market is trending, it doesn’t.  Instead of cutting losses, retail traders often add to losing positions which compounds the problem as the market continue to moves further against the position.  The SSI information is publicly available, updated once per week through DailyFX (http://www.dailyfx.com/technical_analysis/sentiment/) in a special report and twice per day for FXCM clients through DailyFX+ (http://plus.dailyfx.com) .

Below are some charts showing trader positioning for two pairs which have shown strong trends since late June which points out very clearly how the majority of traders have traded during trending market conditions.

USD/CHF: Retail traders have been long USD/CHF ever since it started trending down from 1.1400, and they have been on the wrong side of the market.  If you look below, the green bars indicate that there are more long positions than short positions.  A red bar would indicate there are more short positions to vs. long positions.  The longer the bar, the more extreme the positioning is.  So what did traders do during the most recent downtrend?  Trade against the trend and add to those positions as the market continues to move down.

Source:  http://www.dailyfx.com/technical_analysis/sentiment/?technicalSentiment=USD/CHF

USD/JPY: USD/JPY displays a very similar story with retail traders continuing to buy the dollar as the market has dropped from 91.00 to its current levels.

Source:  http://www.dailyfx.com/technical_analysis/sentiment/?technicalSentiment=USD/JPY

This doesn’t mean that traders will always be wrong.  It simply indicates the type of trading strategy  the majority of retail traders use is not consistent with current market conditions.  If the market starts to range, then it is likely a larger percentage of retail traders will become profitable if they continue to use the same strategy.

To help traders identify market conditions, DailyFX has a basic trend indicator available thorugh the DailyFX Technical section http://www.dailyfx.com/technical_analysis and the DailyFX+ signals go into even further detail breaking signals down between range, momentum and breakout.  The signal performance also displays which strategy has done the best over the past 60 days.  This gives an important clue into current market conditions showing what is currently working and what is not.

Because FXCM uses NDD execution which compensates us thorugh a pip mark-up (essentially a commission), our profitability is directly related to the volume of trades being executed rather than the amount of losses being experienced by our traders.  The more our clients trade, the more money which me make as well.  And the more profitable our traders our, the more our clients will probably trade in turn.  That is why we have gone to the length of providing free resources to traders whether it be DailyFX, DailyFX+, the FX Powercourse, advanced charting through Strategy Trader, etc.