Prove the Insignificance of Retail Traders in Forex
Just take a look at forex trader sentiments on any currency
pair that has been trending for at least 4 to 6 months, and you will likely see
more than 70% (or close to it) of traders on the wrong side of the trade.
example, if the EUR/USD has been going up for 6 months, then roughly 70% of
retail traders will have sold the pair…yet
the trend keeps going up even though 70% of retail traders have sold the
EUR/USD. Even if 100% of retail traders sold the EUR/USD when it was rising, it
would keep on going up as if retail traders didn’t even exist.
That’s because retail traders have virtually no effect on
the market! The forex market is too big!
So the point is that retail traders are not going to change the market direction, which means it pays to be a follower in forex.
Related: Top 3
Reasons Why You Should NOT Daytrade Forex
It Pays to Be a
Follower in Forex
If you set your chart to 1 day candlesticks (or anything
larger), then you will see mega-trends that last for months at a time (and
sometimes even years). Typically, as a currency pair trends in a certain
direction, the number of retail traders getting on the wrong side of the trade
Here's the proof:
The following is trader sentiments (long vs short) for an entire year on the EUR/USD provided by OANDA.
Notice a trend?
As the price goes up (black line), the percentage of traders
selling the pair (orange) increases! That’s insane! Likewise, as the price goes
down, the number of traders buying the pair (blue) increases.
No wonder forex
retail traders lose so much money. They are following the illogical thought
process that it is foolish to buy something increasing in value…so they short
it? I have already discussed why retail traders are always getting on the wrong
side of the trade: The Number 1 Mistake Made by Forex Traders.
So here, we want to
talk about what profitable retail traders do.
What do consistently
profitable retail traders do? They follow the money!
Here’s an example from the GBP/NZD currency pair trending at
an average of 23 pips per day for 2 months:
That’s a guaranteed
average of 23 pips per day trading long-term. If you had made this long-term
trade with 100,000 units, which requires only $2,000 as margin, then you would
have made over $12,000 on this trade in about 2 to 3 months! That's a 600% return on your money! And that’s a
conservative estimate – technically it would have been about $14,000 depending
on when you exited the trade.
So it pays to be a follower in forex.
If you want to win in
forex, then you need to follow the big money because they control the market.
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