Let’s call it a recent “quest for knowledge” that led me upon these three facts about retail forex traders. As you know, I’m not one to spend much time, if any, pouring over news and data, or following the opinions of others when it comes to the markets. However, motivated to find a bit of a different perspective for us to use in viewing the markets and trading, I consulted some reliable sources, and am pleased to be able to share with you a few fascinating items I found as a result.
Now, there are still no sure-fire trades or trading strategies, mind you. These facts about retail forex traders are instead helpful in teaching us more about the market environment, what’s working for traders, and what isn’t. As always, trade only your own, proven methodology, but armed with this newfound knowledge about fellow retail forex traders, may you continue to learn and improve throughout all stages of your market journey.
As it turns out, more stringent industry regulations and heightened competition among forex brokers have more than leveled the playing field for “the little guys” in recent years. Today, retail forex traders are, more often than not, getting better fill prices than what they’re being quoted by brokers. The result? Better execution, faster order acceptance, and lower commissions…much lower, in fact!
One study estimated that more efficient pricing is saving retail traders over $600 million a year, a clear sign that the forex industry is largely moving away from the notorious “Wild West” days when too many retail forex traders were being quietly victimized by unscrupulous brokers.
“The retail trader has never had it better,” said University of Notre Dame finance professor Robert Battalio, who has spoken out and even testified before the US Senate about unfair broker industry practices. And, in addition, retail forex traders have never had more information at their disposal about brokers and pricing practices, with annual studies by Barron’s and other renowned outlets even ranking the “best” brokers in terms of efficiency, transparency, customer service, and more. (See our own list of the best forex brokers here.)
The bottom line? Your broker isn’t a valid excuse for losing trades anymore. Retail forex traders have choices, and those who do their homework and align with a quality broker can enjoy immediate cost savings, not to mention better fill pricing, and more efficient trading overall.
While daily trading volume and the sheer number of retail forex traders have continued to grow, the average trade size has actually been decreasing every year since 2009. This speaks to the rise of micro accounts, as well as the infamous allure of trading on margin, which still makes it possible for some traders worldwide to trade as much as 1000:1 leverage with as little as $50 required to open an account.
Figures like that are rightfully scary, and point to a population of retail forex traders merely gambling while chasing after a windfall profit despite being devoid of any real trading strategy. In part, this is why so many never find their way in the markets long term: Because they were never in it for the “long haul” to begin with.
Meanwhile, there are now over 4 million retail forex traders, with about three quarters of them spread across Europe and Asia. Noticeably missing, though, is a large US forex trader contingent, which numbers only about 150,000 by most estimates.
These facts go to show that retail forex traders aren’t competing primarily with big banks and highly educated traders from the West, as some may have once suspected. Their competition is more international than ever, from serious London-based traders to those ill-prepared mavericks who may be risking their last and only $50 while “trading” from their homes throughout Europe, Asia, and elsewhere.
And speaking of micro forex accounts, while growing in popularity, they’re also proven to be less profitable than more sizable accounts by as much as 10:1. In fact, because of their small size, these micro accounts are also less sustainable because they aren’t nearly as likely to survive a large drawdown, should one occur.
Data shows that forex accounts in excess of $10,000 are many times more profitable and sustainable than the newer, micro accounts that are providing almost instant market access to aspiring retail forex traders with very little capital and no discernable trading strategies.
Of course, the obvious question is, “Well, who among us just happens to have an extra $10,000 lying around?” And this is not to imply that you have to have that much to get started trading forex…the point is this, though: Retail forex traders are practically encouraged to take excess or undue risks when they can think to themselves, “What the heck, it’s only 50 bucks.” In reality, though, it’s your entire account balance, and so throwing caution aside and ignoring risk is never a habit you want to promote with regards to your trading.
My suggestion: Rather than trading micro accounts, and more than likely obliterating them one after another while never being forced or even incentivized to learn a lesson, trade a demo account until you’re more experienced and able to fund a larger account with a couple or a few thousand dollars in it. That will help ensure that you’re actually disciplined with risk, more experienced in the markets, and more responsible with your hard-earned capital than you’d likely be otherwise.
The facts seem to prove it: Micro accounts don’t help retail forex traders get their start in the markets, so now that you know the facts, why consciously choose to do what doesn’t work, right?
See related: 2 Truths and a Lie about Currency Trading
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