Abstract:
The Central Bank of Iran banned online currency trading through Forex brokers in November 2016. However, some Iranian speculators still trade in the online Forex market. Is this prohibition on Forex trading reasonable? According to reports, the majority of Forex day traders fail and leave the market within six months to a year. Some scholars attribute this failure to the changeable characteristics of the losing traders, including low startup capital, failure to manage risk, lack of discipline, and impatience. The purpose of this study was to explore why the majority of traders fail and to investigate the relationship between the Forex market features and the risk of failure. We developed a previous model to address this issue. Given the Forex market is a zero-sum game; the break-even point of the representative player was formulated. The model and simulation results indicated that the expected likelihood of loss is directly related to market features such as leverage, volatility, and the frequency of trading. The minimum rate of expected return, high volatile days, and spread were the other factors affecting the risk of loss. In conclusion, the study confirms the extremely high level of risk in Forex trading, which is inappropriate for the majority of individual investors. Moreover, policymakers need to consider the high risk of loss in this market, and some appropriate regulations seem reasonable on the Forex trading.
Machine summary:
The model and simulation results indicated that the expected likelihood of loss is directly related to market features such as leverage, volatility, and the frequency of trading.
However, advances in online and automated trading have led to the establishment of numerous platforms offering even very small retail traders cheap access to FX markets (Petropoulos, Chatzis, Siakoulis, & Vlachogiannakis, 2017; Zhu et al.
The retail investors view Forex as a possible investment opportunity and the theoretical stream of behavioral economics reveals that individual investors tend to be overconfident, which can lead to excessive trading or day trading (Barber, Lee, Liu, & Odean, 2008; Barber & Odean, 2000; Odean, 1999; Pikulina, Renneboog, & Tobler, 2017; Richards & Willows, 2018).
According to evidence, the majority of Forex day traders fail and leave the market within six months to a year (DraKoln, 2008; Hayley & Marsh, 2016).
Most scholars have mainly been interested in the analysis of currencies fluctuations and prediction of price patterns in the Forex market (BenSaïda & Litimi, 2013; Dewachter & Lyrio, 2006; Ghosh, Ostry, & Chamon, 2016; Sermpinis, Stasinakis, Theofilatos, & Karathanasopoulos, 2015; Teodor & Bogdan, 2015; Zhu et al.
Unlike Forex, the stock market is a positive-sum game, and there are some different results on successful and losing traders (Barrot, Kaniel, & Sraer, 2016; Wang, Lee, & Woo, 2017).
Tayebi, Moeeni, and Zamani (2014) attempted to model the risk of the loss in Forex market based on the gambler’s ruin problem.
5 in each trade, (View the image of this page) There are two possible paths for a mean/representative trader: (1) one failure in high volatile days in which the trader loses his/her entire asset.