Retail forex profitability is about 30 percent. It’s much better than the urban legend of 5 percent profitability, but still nothing to brag about.
So why do 70 percent of retail traders lose money?
Jamie Saettele of DailyFX said one reason is that many of them are range traders.
Range traders assume that currency pairs will stay within a range. When the pairs move to the upper bound of that range, they short it. When the pairs move to the lower bound, they buy.
A by-product of this strategy is that these retail traders tend to sell into strength and buy into weakness. Unfortunately for them, the forex market is often trending.
Of course, whether a market is trending or range-bound depends on the timeframe. For example, a currency pair can be trending on an hourly chart but range-bound on a daily chart.
Generally speaking, the forex market does at times trade within ranges on a daily or monthly chart. However, many retail range traders have much shorter time-frames and therefore get caught on the wrong side of trends on these time-frames.
Contrastingly, many professional traders do the opposite by buying into strength and selling into weakness (i.e. trend following), said Saettele.
Saettele has evidence to back up his claim that the range-bound thinking of retail traders make them lose money.
DailyFX publishes something called the Speculative Sentiment Index (SSI), which aggregates the positions of traders with FXCM, a leading retail forex broker.
Saettele points out that the SSI often shows retail traders shorting a rally all the way to the top and buying a decline all the way to the bottom.
Below are SSI charts from DailyFX that illustrate this:
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