Contrary to what many YouTube podcasters might have people believe, trading foreign currency pairs online is not a reliable get-rich-quick scheme. Indeed, according to the Financial Conduct Authority (FCA), a financial body of the UK, about 80% of retail FX traders lose money, and although 29% of retail investors achieve capital gains, 99% of FX traders fail to make profits for more than four continuous quarters.
A survey conducted by Forex Brokerage FxPro found that only 30% of retail Forex traders were profitable in 2018; and a survey by the European Securities and Markets Authority (ESMA) found that between 74% and 89% of retail Forex accounts lost money in 2017.
Another study conducted by the National Futures Association (NFA) in the United States found that 36.5% of Forex traders were profitable in the first quarter of 2020, but the majority (63.5%) were unprofitable.
And according to a study conducted by the French financial regulator, Autorité des Marchés Financiers (AMF), only 9.6% of retail Forex traders in France made a profit in 2015. The study found that the majority of traders (89.1%) lost money, while only a small percentage (0.3%) broke even.
And finally, an analysis by Chris Davison of Nottingham Trent University confirmed the results from the official European Central Bank Retail Traders Research at the end of 2014. The European Central Bank reported that more than 70% Of retail Forex traders lose money. (The research was carried out using data from leading brokerage firms across Europe.)
So then, these studies all suggest that though the majority of retail traders do fail to succeed in the Forex market, it is nonetheless true that with a significant amount of time, effort and dedication, SOME individuals DO actually manage to become profitable. They use various strategies and techniques to analyze the market and make informed trading decisions. These strategies are typically based on fundamental analysis, technical analysis or a combination of both.
One commonly used approach is to analyze historical data/prices. But interestingly enough, in 2007 a study on
"Temporal Patterns in Foreign Exchange Returns and Options" conducted by Maxime Charlebois and Stephen Sapp found strong evidence that
another source of information had statistically significant value when investing in the underlying asset. This information was
open interest on options.
These two researchers concluded that information from the options market has the ability to predict temporal patterns in foreign exchange returns. Indeed, strategies using information from at-the-money (ATM) options were more consistently profitable than the commonly used strategies based only on historical spot exchange rates (past prices), and consequently, appear to contain information regarding future spot exchange rate movements.
For the study, they used a fairly basic set of rules which were limited to moving average strategies. Nevertheless, all of their strategies based on ATM options were profitable and managed to earn an average mean annualized excess return of 3.42%.
Like Charlebois and Sapp, I too have reason to believe there is at least one other source of information that can add statistically significant value when trading financial instruments—information in the form of temporal indicators that measure the rate at which prices are ascending or descending per given units of time. And as was the case with the study using information from at-the-money options, I believe this information will work by employing a fairly basic set of rules based on moving averages.
To test my theory, I have established a joint venture with a partner in India trading Forex binary option contracts using two of the platforms provided by the Malta-based online broker, Deriv.com.
The insights obtained from this joint enterprise will help to inform the design of whatever curriculum is ultimately adopted as the core of instruction offered to candidates enrolled in Narrowgate's prop desk trader training program.
