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Recently, I spoke with FXCM (NYSE:FXCM) CEO Drew Niv on the phone. FXCM is a leading retail forex broker that recently went public.
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Among other things, we discussed the profitability of FXCM trading accounts. Below are the highlights from the conversation, which sheds some valuable lessons for forex traders.
Lesson #1 - Retail profitability is between 20 to 30 percent, not 5 percent
Forex trading is not as unprofitable as some myths suggest. Niv said the profitability of US FXCM accounts is about 20 percent, contrary to the often-quoted statistic of 5 percent profitability. No one seems to know where the “95 percent of retail forex traders lose money” assertion originated from. Boris Schlossberg of GFT called it an “urban legend.”
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Click here to see the disclosed profitability of the US-only accounts of FXCM and other brokers.
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Lesson #2 – Take it seriously
Niv said for FXCM, the US profitability is skewed downward by the many micro accounts of the company. These micro accounts, which can be opened for as little as $50, are less profitable than averaged-sized accounts because the traders take their accounts less seriously and tend to “go for the moon,” said Niv.
Conversely, FXCM accounts larger than $10,000 have profitability that are double the average, said Niv. Part of it is likely due to the natural selection of profitable averaged-sized accounts surviving and becoming large accounts.
But it’s also because most large accounts probably take trading extremely seriously.
Lesson #3 – Understand leverage
In some countries, the law limits the leverage of retail forex accounts. In Hong Kong, it’s 20:1, compared to the industry high of 200:1 in some circumstances. Hong Kong profitability fluctuates around 50 percent, said Niv.
One explanation for this high profitability level is that many retail forex traders don’t understand the volatility of the forex market and fail to exercise proper risk management when 200:1 or 100:1 leverage is used. Thus, using lower leverage protects them from their ignorance.
Lesson #4 – Hedgers, don’t kid yourselves
Niv estimates that 15 percent of the people who opened accounts with FXCM are hedgers. However, after a few months, the overwhelming majority of them become speculators.
