Risk vs Reward

Risk vs Reward at Forex Trading

Clearly, there are large amounts of money to be made trading foreign exchange. The forex market is a game in which there are many experienced, well-capitalized, professional traders who do nothing else but trade currencies full time. An inexperienced retail trader has a significant information disadvantage compared to these traders. Retail traders are undercapitalized. In a fair game – one with no information advantages – between two players that continues until one trader goes broke – the player with the lower amount of capital has a highest likelihood of going broke first. Since the retail trader is effectively playing against the market as a whole – which has an almost unlimited supply of capital – he will almost certainly go broke.

The retail trader always pays the bid/ask spread making his odds of winning lower. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade must be “resettled” each day, costing the full bid/ask spread every day. Even people running the trading shops warn clients against trying to time the market. “If 15% of day traders are profitable,’ says Drew Niv, chief executive of FXCM, ‘I’d be surprised.” Source – Wall Street Journal