The Traps of Retail FX Trading

I have been trading FX for 6 years now. I have read hundreds of books on fundamental and technical analysis, and I have spent countless hours developing machine learning strategies to trade the markets. What drew me to the foreign exchange markets is the vast volume of trades — after all the trading volume is in the trillions of dollars per day.

Multi-trillion-dollar daily turnover. It’s a number I cannot even begin to comprehend. This is super attractive as the market and my broker should barely know I exist. Colluding should be difficult, and I should be able to trade knowing a market maker isn’t stop loss hunting my insignificant trade. But is this really the case?

About 10 years ago, 5 major banks were charged with colluding and manipulating currency prices. The estimated loss caused by the manipulation is around $11.5 billion per year for Britain’s pension holders alone and the overall world loss is unknown but some estimate as high as $300 billion. We don’t know if this is still going on, but I think it is unlikely this hard collusion is going on to the same extent.

Market makers definitely bum hunt retail trades, just not on an individual level. Many retail traders rely heavily on TA and will set stop losses at similar prices. Market makers can widen the spread or run the stop for a few pips to hit many stop losses at once. However, traders who blame this for their losses will never make it in the FX market. This is the reality of the markets and being aware of this is a step towards long term profitability.

I think the biggest pitfall for retail traders is not the markets colluding against them, but rather their own inexperience with the markets. There are lots of forex gurus online that make it seem like anyone can turn a few thousand dollars into a small fortune. In actuality though, this is all but impossible. FX brokers offer high leverage which encourages new and inexperienced traders to be massively overleveraged. Risk management is key and a series of 10% account downswings will put you out of business. Many traders only trade technicals and forget that fundamentals are what really drives prices. The strategies they implement works until it doesn’t.

The forex market is really for international transactions between large corporations. If a company is expecting foreign currencies in a year, they can hedge against an unfavorable change in prices. So, imagine a large US company is buying out a European startup for $2 billion. Obviously, a broker will not dump the trade all at once as this will drive the price up significantly. They will instead break it into smaller lots and disguise their action. They can manipulate smaller retail traders into entering the market at the wrong time and punish retail traders for chasing a failed breakout.

At the end of the day, retail traders will always have less information than institutions and market makers. Only a very small minority of retail FX traders will make money and it comes down to experience and risk management. There is nothing more to it than that.

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