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Here’s What You Need to Know about Currency Trading

When I meet new folks and they find out I’m working in the financial (some might say investing) industry, the conversation flow usually goes something like this.

New folk: “Wow that’s cool! So you look at the share market and write about it?”

Me: “That’s right! But there’s a difference to what we do at The Motley Fool Singapore as compared to what you might see often in the financial media. At the Fool, we emphasize the act of investing in businesses, not tickers. Shares, to us, represent partial ownership of a living and breathing business.”

New folk: “That’s really cool. But what about forex trading (a.k.a. currency trading)? Do you guys do that?”

That’s when I have to pause and explain that that’s just something which we (and I personally as well) don’t do at the Fool. These conversations also make me realise that for some reason, the act of speculating on currency movements seem to captivate plenty of people. But, there’s an important point about forex trading that perhaps they should know – the odds of success in the endeavour are low.

How low? Try this statistic from a French financial regulator Autorité des Marchés Financiers: “In four years, the percent of clients losing money for all providers combined is nearly 89% [emphasis mine].

I chanced upon the figure in a recent Financial Times article. The piece detailed more from the French regulator, who showed that the “average loss per client was nearly €10,900 between 2009 and 2012” and that over four years, “13,224 clients together lost nearly €175 million, while the remaining 1,575 clients earned a total of €13.8 million.” The real unfortunate thing for me is found in the following statement (emphasis mine):

“Indeed, it appears that the most active and regular investors see their losses mount over time.

I won’t deny the fact that there would be excellent forex traders around – but when the odds of success are 1 in 10 (maybe even lower?), it should make anyone think twice about their ability to consistently profit from the endeavour.

Investing in shares though, is a different thing.

The game forex traders play is on an entirely different ball court from that of share market investors – for a simple reason. The odds of success can be stacked in an investor’s favour over time. Over the course of more than 140 years of market history in the U.S. between 1871 and 2012, investors with a holding period of 20 years have never suffered a negative annualised return.

And an investor wouldn’t even need special investing skills to succeed. All that was needed was wide diversification (through a low-cost index fund, for instance), patience, and the fortitude to hold on for the long-term.

I have also done similar studies (the time period is much shorter as market data in Singapore does not go as far back in time as in the U.S.A.) with Singapore’s market using the Straits Times Index (SGX: ^STI) and the conclusion was pretty much the same: Lengthen your holding periods and you’d see the odds of making a profit increase dramatically.

This plays into an interesting but, in my opinion, often-overlooked aspect of investing: Over time, the share market has gone down faster than it moves up, but it moves up more than it has gone down. This puts the odds squarely in the long-term share market investor’s favour.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.