Much has been told about how difficult it is to make money trading Forex. I've read many articles which say that 9 out of 10 traders blow up their accounts in the first few months. I don't know if this is true, as I've never seen any good study on this matter. So far it's just a something people say kind of statement.
Equally abundant are the articles explaining WHY these traders lose money so quickly in Forex, and what are the tips for you not to be part of this majority. Those tips are pretty much the same in most of them: some are completely useless, if not harmful for traders (usually the ones that go too much into the rules of technical analysis). Some are good indeed, such as money management techniques, teaching about having patience, asking traders to study the markets...
What I truly believe is that most articles are the same because the authors didn't put time to think into the concepts they are about to write. They just write whatever somebody said before, and it becomes a vicious (and very hard to break) cycle. And it amazes me that in all of those articles, very little is said about one of the most (if not THE most) important factors responsible for wiping all those trading accounts: transaction costs.
Forex, as any other market, is a game of probability and expected return. Every time you are opening a position, you believe that your trade has a positive expected return. The factors that influence the result of your expected return are the probability of winning, the winning amount, the probability of losing and the losing amount. Unfortunately, what many people overlook is that the losing amount will always have a little extra weight, because of transaction costs. And this little extra weight compounded into many transactions becomes a very heavy weight. Keep adding transactions and it becomes almost an unbearable weight! The few traders who survive are the ones who really know what they are doing.
I hear many people who say they trade as scalpers, taking several very quick positions in M1, M5 charts and closing with few pips, either at small profit or small loss. While I see the benefit of strategies that take many positions (I will write about luck, law of large numbers and other related concepts later on), the fact is that transaction costs will just obliterate most of these guys.
Let's think about it: A trader has a strategy in which he will take profit with +3 pips or take a loss at -3 pips not considering the spread. His broker has an average spread + comissions of 1 pip. In this setup, he needs to get 66.7% of his positions right just to break even! And we are talking several of these trading setups every day! And before you say that you have such a trading setup, and that 66.7% 1:1 scalping trades are easy to find, please don't bother, because you are already a billionaire and you don't need to waste time reading this.
Also, before you start cursing the brokerage companies: this is not a post against any brokerage company. Transaction costs are part of the game and there is no way around it. You need a broker to give you liquidity, to provide you with a platform and a safe place to leave your funds, and they have the right to charge for their services. Furthermore, the broker charges are just part of total transaction costs. Any market will naturally have a bid/ask price difference, even when there is no intermediary. Costs are part of trading. Period.
The bottom line: It's probably true that the vast majority of traders will lose all their money trading Forex. But the main reason is that the odds are against the trader. The few traders who do become successful know very well the impact of trading costs. They know that they have to beat the house by creating the best high probability setups possible. There's no way around it: patience, discipline and study are the things that will get you to this goal. But when you do, you will be part of the select few traders who survive and thrive in the market.
Equally abundant are the articles explaining WHY these traders lose money so quickly in Forex, and what are the tips for you not to be part of this majority. Those tips are pretty much the same in most of them: some are completely useless, if not harmful for traders (usually the ones that go too much into the rules of technical analysis). Some are good indeed, such as money management techniques, teaching about having patience, asking traders to study the markets...
What I truly believe is that most articles are the same because the authors didn't put time to think into the concepts they are about to write. They just write whatever somebody said before, and it becomes a vicious (and very hard to break) cycle. And it amazes me that in all of those articles, very little is said about one of the most (if not THE most) important factors responsible for wiping all those trading accounts: transaction costs.
Forex, as any other market, is a game of probability and expected return. Every time you are opening a position, you believe that your trade has a positive expected return. The factors that influence the result of your expected return are the probability of winning, the winning amount, the probability of losing and the losing amount. Unfortunately, what many people overlook is that the losing amount will always have a little extra weight, because of transaction costs. And this little extra weight compounded into many transactions becomes a very heavy weight. Keep adding transactions and it becomes almost an unbearable weight! The few traders who survive are the ones who really know what they are doing.
I hear many people who say they trade as scalpers, taking several very quick positions in M1, M5 charts and closing with few pips, either at small profit or small loss. While I see the benefit of strategies that take many positions (I will write about luck, law of large numbers and other related concepts later on), the fact is that transaction costs will just obliterate most of these guys.
Let's think about it: A trader has a strategy in which he will take profit with +3 pips or take a loss at -3 pips not considering the spread. His broker has an average spread + comissions of 1 pip. In this setup, he needs to get 66.7% of his positions right just to break even! And we are talking several of these trading setups every day! And before you say that you have such a trading setup, and that 66.7% 1:1 scalping trades are easy to find, please don't bother, because you are already a billionaire and you don't need to waste time reading this.
Also, before you start cursing the brokerage companies: this is not a post against any brokerage company. Transaction costs are part of the game and there is no way around it. You need a broker to give you liquidity, to provide you with a platform and a safe place to leave your funds, and they have the right to charge for their services. Furthermore, the broker charges are just part of total transaction costs. Any market will naturally have a bid/ask price difference, even when there is no intermediary. Costs are part of trading. Period.
The bottom line: It's probably true that the vast majority of traders will lose all their money trading Forex. But the main reason is that the odds are against the trader. The few traders who do become successful know very well the impact of trading costs. They know that they have to beat the house by creating the best high probability setups possible. There's no way around it: patience, discipline and study are the things that will get you to this goal. But when you do, you will be part of the select few traders who survive and thrive in the market.
Original post in our website: mononfx.com/blog
