## The Average Forex Retail Trader: A Poor Risk Adjusted Performer Against the Market

Oh yes, the rich retail trader. Most people enter the world of trading with the idea of becoming this sort of “guru” who makes a living by trading a few hours each day, then drives his Ferrari down the beach and parks it on one of his many beach-front mansions. Although this view is quite exaggerated most people believe that they will be able to easily achieve something much more modest – like a comfortable yearly income between 50-200K – without a lot of effort or problems. The idea that this can be easily achievable derives from the fact that the media portray that the first case is achievable and therefore “realistic Joe” tends to believe that this might simply be a hyped version of what most people actually achieve. Certainly most people will believe that getting super rich from trading in a year is a fool’s errand but ask them about making a 50K USD income from 1K USD and they will believe that to be quite realistic.

As you see on the above graph most traders fail to beat the market because they trade in a much riskier way without achieving a better performance than the S&P500. Although many of them have enormously profitable results they are simply getting them at the expense of market exposure without justifying the additional risk. The black line I drew represents the line which you need to cross in order to “beat the market”. The managers which are in the green zone are those who have a risk adjusted performance which is better than the market’s while the traders in the red zone are performing worse than the market.

The interesting thing we need to analyze here is where most traders are located. Yes, many of them have performance which – without considering risk – is higher than the S&P 500 but when you consider the risk they are taking to obtain that amount of return it becomes evident that they are not beating the market but merely leveraging their risk against a “worse than the market” strategy. If you had a strategy with a 10% profit and a 10% maximum draw down you could beat it – performance wise – with a strategy that has a 20% profit and a 40% draw down, however when considering the risk taking it becomes evident that you’re simply risking more as you are making less money for each dollar you risked.

Most Forex traders are doing exactly this, they are deceiving themselves into believing they are making more by leveraging strategies which are worse than the stock market’s buy and hold performance. They are getting the delusion of profits by over exposing themselves towards the market, they are taking a level of risk which is not justified by the level of profit they are achieving. This is sadly more the norm than a simple rare occurrence, if you analyze the performance of signal providers through a principle similar to currensee’s you’ll notice that the large majority of traders are really simply taking high risks that put their accounts at peril to make it look like they are beating the market when they are simply the trading analogue of a person getting a 1 million dollar loan to appear rich while working at a McDonald’s.

Long story short, is is extremely important to always look at trading results from a risk adjusted perspective and see things how they really are. If someone is making a 100% return every month but it is evident that they are putting their account on the line on every trade then they are trading below the market’s performance and they are bound to eventually lose everything. Looking at the returns of traders with a risk adjusted perspective against a market index like the S&P 500 is a very good way to see who is really beating the market and who is not. As I have said before if you would like to compare yourself to some good currency traders then compare yourself – after a few years – with the performance of the Barclay traders index, a serious index that encompasses the results of serious Forex traders which have track records that span from 5 to 20 years.

### 4 Responses to “The Average Forex Retail Trader: A Poor Risk Adjusted Performer Against the Market”

1. Franco says:

Wisdom like yours is not easy to find…

Hi Franco,

Thanks a lot for your comment :o) I don’t consider myself especially wise but I do appreciate the fact that you consider me so! Thanks a lot for stopping by,

Best Regards,

Daniel

2. Vitor says:

Ive been learning about currency market for a year, I only traded demo account, so I never won or lost a penny, but I think Im going the right way to beat the market:

Few thing I learned, tell me if I`m wrong Daniel:

Research until you find reliable source of information and education in the internet, then you avoid the scams.

Study until you fully understand about money management, also study statistics

Start to trade with a small account, risk the money you can afford to lose.

Look toward the future, make your expectation in long term, there is not miracle, be patience, be disciplined.