In our forthcoming book we talk about why foreign exchange trading is for most retail traders a losing proposition. In case you doubt this proposition you need only read this Heard on the Street piece by John Jannarone. Case in point, FXCM Holdings ($FXCM). The article notes that on average 70% of the company’s customers are losers each quarter.
Why do so many FXCM clients, and clients of other retail forex brokers have such a hard time becoming profitable? The one-two punch of leverage and high trading costs. Jannarone writes:
FXCM says it collected $98 in trading revenue per million dollars traded in 2011. Those fees could mount quickly. In the example of an account with $20,000, levered 50 to 1, each trade costs about half a percentage point of the customer’s equity. The average active account made 2.7 trades per day last year.
If your account is getting hit 1.35% in trading costs per day (2.7 * 0.5%) you have to do some pretty nifty trading to make up for it. Apparently not many do. Take heed what Josh Brown, The Reformed Broker says about retail forex trading, “Just don’t do it.”
Update: We just came across this piece by Reshma Kapadia at SmartMoney on the big difference between currency trading and currency investing.