Forex trading – Why the odds are stacked against you

The Foreign Exchange Markets are at best a Zero-Sum game. A Zero-Sum game is a game or activity where improving your on situation can only come at the cost of worsening another persons situation. Things get worse for the retail Forex trader as they are participating in a market place with many experienced and well capitalized traders, inexperienced retail traders are expected and are likely to be at a significant informational disadvantage.  

Things get worse for the individual retail trader as almost by definition retail traders are vastly under-capitalized. This makes the retail trader subject to the problem of gamblers ruin. In a fair game (one with no informational disadvantages) between two individuals that continues until one player goes bankrupt, the least capitalized player has a much higher chance of going bankrupt first. But since a retail Forex company is effectively speculating against the whole market they have very little chance of going bankrupt. The retail trader is also at a disadvantage as they have to pay a larger bid/ask spread which makes the odds for winning at Forex trading less than those experienced in a fair game. The retail trader can also experience other additional costs which again make it yet harder to come out on top. 

While there are opportunities that allow for individuals to make unusually large returns, but this does not mean that more people could earn the same returns even with the same tools and knowledge. Information about to how  to earn money trading such opportunities is a nonrival good while the particular trades themselves are a rival good. For example the amount of buried treasure on a tropical island remains the same no matter how many people are selling maps or information to treasure hunters seeking the buried treasure.

Does this mean that you can’t earn money trading Forex? No, it doesn’t it just means the odds against you earning money trading Forex are significantly stacked against you. The Chief executive of FXCM said that he would be surprised if 15% of day traders where profitable. Those interested in Forex should bare this in mind before they jump into trading Forex. 


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