Consider the competitive landscape before deciding your Forex market play

Retail spot forex trading is financially zero sum for the market as a whole. That means any profits made by one individual must come at the expense of someone else (or multiple someones). Actually, when you factor in the costs of bid-ask spreads, commissions where charged, and the bid-ask spread in carry interest rates (yes, they have a bid-ask spread there too!) for positions held overnight, retail forex trading is actually negative sum for the market as a whole. This is something to keep in mind as you think about your participation in it. (Feel free to use the comment section below to voice your arguments against the above statements. I will happily refute them. J )

Why should you care?

Because it means retail forex is a game driven by skill. While just about anyone can make money in the stock market by holding a mutual fund or index ETF in a bull market (or even in an overall flat market when factoring in dividends), nothing can be further from the truth in forex. It’s a lot like poker where in the long-run the money will tend flow from the weak players to the strong ones. As a result, you want to be among the strong players to have any reasonable expectation of long-term success in the market.

Of course one of the things many folks have relied upon to keep the trading profits flowing is the constant influx of new traders into retail forex trading. They are weak players for the most part, and their losses feed the stronger ones. Of late, however, the growth in forex trading (retail and overall) has stalled out. We’ve even started to see contraction in places. That means those weak newbies aren’t flowing into the market the way they were, and they may even be leaving on net. That will tend to make the market more competitive if it continues, requiring a higher level of skill.

On top of that, social trading has gained a lot of traction recently. That effectively increases the portion of the market controlled by the better skilled traders as more accounts mirror their trades (assuming, of course, those traders being mirrored are in fact skilled).

Combine a market where the weak players may be leaving on net with an increasing proportion of the market under control of skilled players and you have the makings of rising competition among traders. This is something would could actually create a feedback loop whereby traders who don’t feel they can compete personally will allocate funds to programs like Trade Leaders. Furthermore, it will make increasingly clear those who really are highly skilled and those who are only pretenders.

Something to think about as you ponder you own involvement in the markets.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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