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Why the Swiss National Bank Actually Helped Forex Speculators

For the majority of retail speculators it is better losing it all at once and getting on with their life rather than losing their capital slowly over time and wasting many years to find out that profitable  high leverage forex trading is an impossible scheme.

In my November 2, 2013, blog “Frequent Retail Forex Trading is a Losing Negative-Sum Game“, I presented quantitative analysis that shows why most retail position and swing forex traders are doomed even if they do not effectively utilize leverage. Also, that nearly 100% of intraday forex traders that utilize leverage and pay commission in the form of spread are doomed because of the nature of this negative-sum game that is designed to benefit market makers at the expense of traders.

Therefore, I strongly believe that the SNB with its move last week relieved many speculators from a slow and painful process of realizing that forex trading is not a profitable game, by lifting the Swiss Franc’s peg to the Euro.  Now, those speculators can go on with their life and do something else that will be to their benefit instead of making market makers wealthy. I am sure many will appreciate what I am saying here in the future.

Below is a randomization study that shows the zero-sum nature of the forex game in the case of 20,000 random EURUSD traders that toss a coin to enter long or short at the close of each day, trading an initial account of $100,000 with one standard lot, which means that the effective leverage is 1:1. There is no spread paid and all trades take place at the ask price. In reality, only long trades get filled at the ask and short trades get filled at the bid and, as it turns out, the results of this simulation are conservative for the short side but this fact does not affect the conclusions. The daily EURUSD data cover a period of nearly 13 years.


It may be seen that this is a zero-sum game with nearly half of the random traders realizing a positive return (49.42%) and 3.65% getting stopped because at some point equity drops below the required margin of $2,000 (50:1 leverage). These are the only two statistics we will concentrate on for the purpose of this study.

Next, we repeat the same randomization study by reducing the starting capital to $10,000. Recall that most retail speculators start with an even lower capital and outside of the USA the margin can get as high as 400:1. The results are stunning:


In this case, 85.13% of random traders are stopped and only 14.61% show a positive return. Now, keep in mind that in this simulation there was no spread and commission included. Inclusion of these would make things worse. Also, these are results for daily data. There is no reason to present results for intraday data because any amount of commission turns 100% of intraday retail forex traders into losers in the longer-term as was shown in the mentioned blog.

On common objection to this study is that: “I’m not a random trader. I use tools, technical analysis, patterns, indicators and my trades are intelligent.” The answer is: “No, you are a random trader unless you can prove you are not.”  The idea for this answer is that if someone says that there are unicorns, the burden of proof is on him and not on the others to prove that here are no unicorns.  But if this justification based on principles of logic does not suit you, then you may think of it this way: When you place a trade, the market does not know whether you used an indicator, a system, a pattern or the whole library of books on technical analysis, or you just tossed a coin. All you do is entering orders. Maybe your trade sequence will be good enough to qualify as an exemption and rank high in terms of profit-making. But for the majority of retail trades, the trade sequences they generate are indistinguishable from those generated by tossing a fair coin. This is the way it is, experience proves that, statistics of trader failures prove that. I admit there will always be exemptions due to either skill or luck but this study was about the majority of traders who think they do possess a skill when in fact they do not and the truth is that they came across a random sequence of trades that worked well.

Yes, the SNB made a favor to thousands of retail forex speculators to continue with the life, by relieving them from the pain inflicted on them by the slow process of losing money in the negative-sum game of retail forex trading.

If you are interested in positive-sum games, read this blog.

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Disclosure: no relevant positions.
Charting program: Amibroker