Investing is exciting, and based on one’s experience and knowledge level, there are many different markets and assets to invest in. Part of what makes investing so compelling is the element of risk. It is not always certain that one will profit, and it takes talent, skill, and good foresight to predict successful trades. One must know the mechanics of the market and vehicle he chooses to invest with and understand the external variables that can influence a trade’s profitability. Because of all these factors, beginning investors often seek to find the simplest and most successful markets to trade in.
There is no hard and fast success rate for forex. It is commonly claimed that forex has a 5-10% success rate for beginners. In other words, most beginning forex traders fail. Hard data shows that only between roughly 20-30% of active, non-discretionary forex traders have profitable forex accounts.
This relatively low success rate is due to not only the nature of forex, which entails trading with two currencies and understanding an exchange rate but also due to the number of external variables influencing a currency’s value. Forex can be very profitable for people willing to put in an effort, study, and practice. But as with any investment, there are risks to trading currencies. This article will further explain the success rate of forex trades, the risks involved, and techniques for improving one’s success.
Profitable Account Statistics
It is not always possible to assess the skill or level of traders who hold forex positions in retail trading accounts, so it is hard to say for sure the success or failure rate of beginners versus intermediate versus professional traders.
A data set listing 11 brokerages from Q4 2011 to Q1 2012 compiled by Finance Magnates compared the percentages and number of profitable trading accounts.
They found that 27.5% to 40.6% of retail forex trading accounts were profitable in 2012, down on average 2.8% from the previous quarter. They also found that in 2012 roughly 120 more accounts were opened between the 11 studied brokerages.
In 2020 retail trading surged as people were locked down and turned to online and application trading platforms to spend their time and money. The platform IG reported that their forex accounts almost doubled from December 2019 to March 2020, jumping from 2,650 accounts to 4,281. (For the purpose of this data, they only considered active, non-discretionary accounts.)
Note: Non-discretionary means that the account holder always manages trades and that there is no financial planner who has the right and ability to execute trades on behalf of the account holder. While this is not a surefire indication that the account holders are laymen, it is safe to say that most are probably not professional CFA or CFPs.
In 2019, before COVID-19 lockdowns, 29% of their forex accounts were reported to be profitable, while the remaining 71% were not. In 2020, after the number of accounts doubled, the percentage of profitable accounts dropped by 3.31% to only 25.69% of accounts.
These two data sets are not conclusive and do not even measure the same sample of brokerages. It can be inferred, however, that beginner traders bring down the percentage of profitable accounts. Withmore non-discretionary retail trading accounts opened (presuming these are novice or inexperienced traders opening accounts), the rate of accounts netting loss increased.
As stated above, people seem to repeat the numbers 70%, 90%, and 95% when estimating the percentages of people who fail when beginning to invest in forex. However, these numbers may not be accurate.
According to Dailyforex, in 2009, more than 50% of FOREXCM (an online forex broker) trades were profitable.
However, this data is in reference to the trades made, not regarding the individuals. Furthermore, the data was collected in 2009, which does not reflect the 2020 massive increase in new users on online trading platforms.
What Factors Influence Success Rates in Forex?
There are specific risks that forex traders face, which can influence profitability. Successful traders are aware of these risks and consider them when investing. All traders will inevitably face some losses, but the net-successful traders can minimize their losses by correctly anticipating future value.
TIP: It is important to remember that investing involves knowing how the financial vehicle works and keeping on top of the latest news and events that might influence an asset’s value.
Changes in interest rates, of both central and private institutions, can drastically change a currency’s value.
The central banks of most major countries release reports on their interest rate levels monthly. In general, a higher interest rate means the currency will strengthen in value relative to other currencies. In contrast, a falling interest rate means that the currency’s value will fall relative to others.
Interest rates affect a currency’s value because they determine the returns one can make on cash held in banks, on bonds, and other assets.
The equities’ price is typically inversely related to interest rate changes because, with lower interest rates, there naturally follows an increase in consumer and commercial borrowing and spending. The increased spending drives up demand, and thus price. Furthermore, because investing in equities is more attractive when the currency is strong, as the price of a stock rises, it becomes less attractive to hold said currency.
Because it is profitable to invest in countries with high interest rates, it increases the demand for these currencies and further drives the relative price up for those currencies. The inverse is true for low-interest rate countries.
Consequently, interest rate reports are important to watch, as the rates will influence one’s portfolio. There are often indications or announcements before any official rate changes; therefore, active traders are always listening in the news for these changes to be on top of their assets.
Foreign exchanges, like options, futures, and some securities trading, allow traders to make leveraged trades.
Forex is special because it allows 200:1 leveraging. 200:1 leveraging is higher than what is typically allowed for when trading other assets on a margin. This is because the change in the value of currencies is low, relative to other assets.
In general, the higher the leverage ratio, the lower the amount traded. Also, as with most other margin accounts, investors must meet specific requirements, both in experience, success, and capital set by the brokers to qualify for margin trading.
The margins required for making the trades vary from broker to broker, and even from currency to currency. Currencies that are more volatile or emerging require a higher margin often.
Examples of such currencies include:
Leveraging can be great for increasing the profits of a successful trade! Increasing returns by a factor of 200 is an easy way to grow one’s portfolio, but, as with all leveraged trades, the flipside is that it can also decreaseyour portfolio by the same factor in a losing trade.
While leveraging does not necessarily increase risk (as the fact that a trade is leveraged does not affect the probability of success), it does increase the possible losses by whatever leverage ratio one is trading with.
It makes the wins sweeter, but also makes the losses harder. This can be very tempting for zealous, naïve beginners, but it can also be a big mistake!
To mitigate the risks of leverage be confident, be experienced, and place stop losses.
The monetary policy of a country can change the value of a currency because it influences the money supply.
Note: Money supply is the economic term for the amount of currency available in the world. This includes the number of units of said currency available on the foreign exchange market, the amount held domestically, and the amount held by governments.
Currency is a good, just like oil, gold, and food. It is important to remember that, as with all other goods, the price of a currency (in another currency) is determined by the supply and demand of that currency.
Some policies that governments may enact that can affect supply are:
- Quantitative Easing: injecting “free” money into banks and other financial institutions. This increases the money supply and decreases the value of a currency.
- Changing Reserve Requirements: these are the amounts of cash that banks are required to hold. Lower reserve requirements make lending easier and thus increase the money supply. An increase in the money supply decreases the value of said currency. The inverse is true for higher reserve requirements.
- Open Market Operations: buying and selling bonds. When federal governments buy back bonds, it increases the money supply. When federal governments sell bonds, this decreases the money supply; this reduces and increases the value of a currency, respectively.
- Changing the Discount Rate: the rate charged on loans to commercial banks from the federal reserve. As with the interest rate section above, with lower rates, more money is circulating in the economy and lowers the currency’s value. With higher rates, less money is borrowed/lent, and the money supply remains the same or shrinks, thus increasing the currency’s value.
Other External Factors
Many other factors can influence a trade’s profitability or a portfolio holding foreign currency or assets. These factors, in brief, are as follows:
|Increases Value||Decreases Value|
|Increased GDP||Decreased GDP|
|Natural Resources||Natural Disasters|
|Low or Falling Interest Rates||High or Rising Interest Rates|
|Increased Exports||More Imports|
Of course, a combination of these factors, or other unmentioned variables, might result in a stereotypically value-adding event coinciding with a decrease in value. It is essential to take a holistic approach when analyzing the market to make a trade.
Finally, it is also essential to understand that one’s strategy and execution influence an investment’s profitability.
This means that no matter how successful others are in forex, if you do not use appropriate strategies and techniques, and if you are not on top of the trade, it will reduce your likelihood of success.
Some common strategies used in the forex markets are:
- Candlestick Patterns
- Bullish/Bearish Engulfing
- Bullish/Bearish Harami
- Wave Patterns
- Elliot Wave is standard for forex trading
- Ichimoku Kinko Hyo
- One study by Deng et al. found that when trading USD/JPY, Ichimoku Clouds were not successful. On the other hand, author and forex trader, Kiana Danial, advocates for the use of Ichimoku Kino Hyo in Invest Diva’s Guide to Making Money in Forex.
Using these accepted trading patterns and strategies can improve one’s chances for success in forex markets.
Tips for Successful Trading
To invest in forex successfully—meaning that one has more positive gains than losses—there are several general investing and forex tips to follow.
- Use Charts. Charts, for any asset, can be helpful by visually showing the price action of an asset. With the help of other indicators, this can show the investor trends, reversals, selling, and buying points. TIP:Remember to switch charts when buying and selling. The bid price is the selling price, the asking price is the buying price, and the spread is the potential profits to be made.
- Manage Risk. Do this by protecting capital, placing stop losses, and only leveraging when confident and capable. Furthermore, if a trade goes south, get out before more losses add up.
- Time Correctly. It is crucial to exit trades—and not be greedy—in time. Especially with forex, because pips are so small, it can be tempting to wait for more to stack up. Remember: Pips may seem small, but they add up to a lot when making thousand-dollar or more trades.
- Trade with the Trend. This is important for beginners, as it is often more challenging to spot reversals than trends.
- Go Slow. Unlike the drastic swings and changes one might see in equities, currencies do not change very much in value. They might still be volatile, and some change more than others. But the differences are typically less than 100 pips per day. That might only equal a few cents. Don’t be too greedy, and don’t think that forex is a get rich quick investment strategy.
- Trade Small Amounts. Start by trading micro-lots (1,000 units of currency); this will help to make losses smaller as you learn more investment and forex strategies.
- Know When to Say No. This goes for all investing. Do not trade when you are not mentally, physically, and emotionally ready. It is easy to become addicted to winning or to the thrill of a trade—but don’t let that feeling cause you to trade on a bad or off day. Wait until you are fully ready and have done all the research necessary before making any trades.
- Trade Small Time Periods. As with other investments, the longer one plans to stay in a trade, the more fundamental analysis needed; this means that day trading or trades with conservative stop-losses are the least risky choices. Small, but frequent, profits and losses can be better than a few more considerable gains or losses (this is, however, dependent on one’s risk appetite, personality, and goals).
- Pick a Pair. Start by trading one currency pair; this limits the research one must do into multiple countries. Naturally, it is more intuitive to trade one’s own currency and know its own national policies and news (which could affect value). TIP: The most liquid currency is the USD, meaning it the easiest to buy and sell.
(Source: Forex Fraud)
Increasing Chances of Success in Day Trading
Day trading is very popular, and forex is a common market to trade in.
Some of the foreign exchange market’s qualities are:
- It has a high volume of trades.
- It is a very liquid market.
- The changes in value are low.
- The capital required is only $1,000.
- It has low or no commission fees with most brokers.
Because of these attributes, and the general ease and increase in retail trading, day trading forex is easy to do.
The following tips can help make forex-specific day trading profitable:
- If this is your first time day trading, do not start with forex.
- Be more conservative in risk management (i.e., setting stop-losses)
- Try for a 50% success rate; otherwise, wait a little longer, study more, practice some, and then give it another try later.
- Don’t be surprised if it takes a few tries to make money.
- At the same time, do not try to learn by trial and error. This is expensive!
- Find a low commission broker because you will likely be doing more, smaller trades.
- Focus more on technical analysis than fundamental analysis. (But don’t ignore fundamentals!)
Although many people, especially with 21st-century technology and the rise of retail investing, can become investors, it does not mean everyone should.
There are many risks involved in investing. More specifically, forex is risky because of the number of variables, the fact that two currencies are being traded, and the temptation of leveraging.
Starting to trade forex can be tricky, and the data shows more than half of accounts are net-loss. Indeed, foreign currencies are not an asset for beginner investors. However, for those with a little experience trading other assets, there are many tips and strategies for making a forex account profitable.
Danial, Kiana. Invest Diva’s Guide to Making Money in Forex. New York: McGraw Hill Education, 2013.
Deng, Shangkun, Haoran Yu, Chenyang Wei, Tianxiang Yang, and Shimada Tatsuro. “The profitability of Ichimoku Kinkohyo based trading rules in stock markets and FX markets.” In International Journal of Finance & Economics. Wiley, June 2020.