The Retail FX Trader: Random Trading and the Negative Sum Game

Davison, C ORCID logoORCID: https://orcid.org/0000-0001-6965-4617, 2016. The Retail FX Trader: Random Trading and the Negative Sum Game. Rochester, NY: Social Science Research Network.

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Abstract

With the internet boom of early 2000 making access to trading the Foreign Exchange (FX) market far simpler for members of the general public, the growth of 'retail' FX trading continues, with daily transaction volumes as high as $200 billion. Potential new entrants to the retail FX trading world may come from the recent UK pension deregulations, further increasing the volumes. The attraction of FX trading is that it offers high returns and whilst it has been understood that it is high-risk in nature, the rewards are seen as being commensurately high for the 'skilled and knowledgeable' trader who has an edge over other market participants. This paper analyses a number of independent sources of data and previous research, to examine the profitability of the Retail FX trader and compares the results with that of a simulated random trading models. This paper finds evidence to suggest that whilst approximately 20% of traders can expect to end up with a profitable account, around 40% might expect their account to be subject to a margin call. This paper finds a strong correlation between the overall profitability of traders and impact of the cost of the bid-ask spread, whilst finding little if any evidence that retail FX traders, when viewed as a group, are achieving results better than that from random trading.

Item Type: Working paper
Publication Title: Social Science Research Network
Creators: Davison, C.
Publisher: Social Science Research Network
Place of Publication: Rochester, NY
Date: 5 January 2016
ISSN: 1556-5068
Identifiers:
Number
Type
10.2139/ssrn.2711214
DOI
Divisions: Schools > School of Science and Technology
Record created by: Linda Sullivan
Date Added: 26 Jan 2016 09:00
Last Modified: 09 Jun 2017 13:58
Related URLs:
URI: https://irep.ntu.ac.uk/id/eprint/26837

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