23/10/2014: Interesting article on FX Trading by Louise Cooper

Churn & Burn

Earlier this week the Times columnist and blogger Louise Cooper wrote a piece for her column entitled “Be wary of dipping a toe in foreign waters….” regarding the results of a recent French regulators investigation into the practices and results of private FX trading.  It was a very interesting and well-written piece. The investigation made, I suspect, rather sobering reading for the uninitiated. For those of you who’ve been trading for sometime you’ll probably be glumly aware of the horror stories. The results of which were that 90% of people lost money and the average loss was 10,900 Euro! Here’s the link (if you have access to the Times pay wall):  “Be wary of dipping a toe in foreign waters…”

If you don’t have access to the Times site then you can watch her appearance on the ever entertaining Tip TV: Soapbox discussion Louise Cooper

What are we to make of all this?  Well the overall loss rate wasn’t a surprise to me, but the average funds lost was a bit of an eye-opener.   What I’d like to have known was:

– of the loss rate how many were just punters and how many were educated?

– how long had those people been trading?

– of the amount lost, in how many trades did it take them to go bust?

– what time-frames where these people trading?

– for the successful traders what was their time-frame and trade frequency?

– for the successful traders how many were trading for income and how many were trading for growth?

Clearly the data provided is very skimpy and open to interpretation. Not surprisingly the likelihood of me getting answers to my questions is roughly zero percent. (Though I reckon I could make a good stab at what the answers would be!)  I’d be interested to see what the results were for UK & Ire traders – I suspect they maybe more educated / savvy traders in FX markets (I’m happy for someone to disabuse me of the notion with alternative evidence) – also what were the individuals trading, either direct FX, spread-betting or CFDs? (I’m presuming it was the former – not sure if the other two are available in France?) Louise is right when she says she’d like to see more transparency from retail brokers – however I wont hold my breath waiting for it to happen.

For years now I’ve been boring people with the ‘Triple 90’ rule that 90% of people lose 90% of their money within the first 90 days of opening their brokerage account. You might want to read that again. That is some horrific statistic – however strangely enough even when I tell newbies about that rule their ‘optimism bias’ kicks in and they believe that they’ll beat the odds. Interestingly it doesn’t take that much to beat it. A little bit of solid education and an understanding of risk-management and position-sizing can put you in the top 20%. Alas,that doesn’t mean you instantly become the next George Soros or Paul Tudor-Jones. It just means you survive the first major obstacle that culls most newbies and then you work your way up from there. Which will probably take years.

I’ve also bored people with the saying that “everyone pays for their education” – and its true. You either go through an informal education process where you trade time for money or you go through a formal one where you work with a mentor of some sort. Both routes have their pro’s and cons and like any good business decision is based on the individual doing their own due diligence. Even working with a mentor will probably take you 18-36 months of hard work, and there’s no guarantee of success.

Those who’ve heard me speak, seen my presentations or read my blog will know that in an earlier life I used to help train RAF pilots to become better Fighter Pilots (and I have a father who used to be one). Furthermore I grew up in a house where my mother spent years training and guiding new doctors and nurses on how to operate safely in Hospital Intensive Care and High Dependency Units. One of my old friends used to run his own successful motor-racing team.

Where am I going with this? The element that combines all those endeavours in the preceding paragraph (and financial trading) is that  all take years of dedication and training to be able to excel at such performance activities in fluid, dynamic and demanding environments. Yet we see huge swathes of people who think they can pay £2000 for a weekend course and then be able to profitably operate in such an environment as day-trading financial markets.

You wouldn’t get on a Jumbo Jet that was being flown by someone who’d only done a weekend flying course. Nor would you countenance brain-surgery from a neurosurgeon who learnt his trade from a $97 e-book. And yet human beings and their optimism bias (more on that in the future) think that they can do that with trading financial markets.

There’s a good deal of self-delusion (and effective marketing)  going on and not surprisingly there are finely honed commercial organisations who are able to use that for their own profit. If you want to survive, learn and then prosper in markets you’re going to have to undertake some form of education / training / mentorship to help get you there. Please be under no illusion it will also probably take you roughly 18 – 36 months (depending upon background and skill) of such mentorship to learn to operate safely and effectively.

I’ll be interested to see if her article helps change the industry – however I wouldn’t bet my house on it!

Ok, rant button switched to off.

Trade well (and safely)

Paul