The extreme risk of the foreign exchange (forex) market has resulted in 76% of retail traders losing in the long term (FCA 2023 data), the primary reasons for which are over-leveraging, emotional trading and lack of risk management. Taking the 1:100 leverage as an example, when the price is 1% against the trend, the original amount is lost 100%, and data has shown that the average rate of losing traders’ leverage utilization is 1:50, significantly greater than that of professional traders at 1:10. When the COVID-19 outbreak occurred in 2020, the USD/JPY fell 500 points in 15 minutes and created a 300% increase in leveraged accounts and a loss of more than $1.2 billion for global retail traders in just one day.
The lack of a systematic strategy is the other major reason. Day traders take 12 trades per day (6 times that of swing traders), but are only successful 38% of the time (CFTC data). High frequency trading is accompanied by aggregated costs: commissions and spreads are $7 on average per standard lot, and monthly costs of $1,400 (28% of the $5,000 capital) if 10 lots are transacted daily. In the 2023 My Forex Funds scam, the EA approach that had “zero risk arbitrage” lost 99% of its customers through manipulation of the slip points worth $310 million.
Emotional decisions overstate losses. The test proved that only 20% of the demo account winners actually earned a profit in the first month due to the mood swings reducing the stop-loss rate from 95% to 61%. In 2022, ZuluTrade’s tracking platform users lost more than $20 million weekly due to the fact that they were blindly following “star traders”, and the six-month retention rate of the TOP 10 signal providers was only 35%. Besides, winners retain a position for 48 hours, losers for 9 hours – overtrading generates an increase in error rates (from 25% to 58% of the time the chance of a bad decision).
Education exacerbates the risk. 72% of paid forex classes, according to FBI data, copied content from free sources (e.g., Babypips), and strategies that guaranteed a “90% win rate” had a mean annualized return of -23%. The odds of an inexperienced trader making a genuine profit are only 12%, but jump to 38% after achieving 6 months of formal training, such as the CME Institute course. However, 5% of the retail traders receive such training, and backtest statistics reveal 80% of self-created systems perish due to market noise following the live-trading duration.
Uncertainty in the market is deadly. In 2022, when the Bank of Japan intervened in the FX market, the USD/JPY fluctuated 8% in one day, exceeding the forecast range of technical analysis (Bollingband width ±3%), and initiated serial triggering of stop-loss orders. When non-farm data are released, the probability of EUR/USD to move more than 20 points in 1 second is 73% (stats 2019-2023), and if the position is wrong, a standard lot loses $200 immediately. Carry trades (long AUD/short JPY, for instance) also carry negative interest rate risk – AUD/JPY overnight interest cost annualized -6% in 2023, ruining long-term gains.
Platform and regulation risk are added to the mix. Offshore platforms like those based in St Vincent are not required to separate funds, with $1.2 billion of forex fraud worldwide in 2023, 68% of which was conducted via non-FCA-regulated or non-ASIC-regulated platforms. For instance, FXChoice manipulated quotes so that stop losses initiated a 1.2% discrepancy from the market price, and almost 30,000 investors lost $80 million. Fca-regulated platforms are required to make quality data public – Deutsche Bank’s EUR/USD order slip average is 0.8 points (transparency of compliance costs).
Cognitive and emotional biases are not easily broken. The median winner trader achieves a 15% annualized return, but is forced to weather a 40% retracement (VIX median 22), while the loser expects over 50% yearly profit (actual median -23%). IG Group survey from 2023 showed that 83% of novices illogically think that “technical indicators can anticipate all changes,” while actual price action is more than 60% random (Hurst index analysis).
Finally, rampant leverage, traps of emotion, and information asymmetry in the foreign exchange market lead to excessive loss rates. According to the IMF, only 9% of retail traders are able to make a profit for three consecutive years, and traders who strictly follow the 2% risk rule (one loss of less than 2% of capital), have less than 1:10 leverage, and perform 500 hours of simulation training can reduce the chances of losses in a year from 76% to 41%.