Risk Management in the Forex Market (Part 3)
Detailed Plan Example

A trading plan is so critical to success that a hypothetical example is warranted for deeper illustration.

Assume a speculator decides to enter the forex futures market. He allocates $10,000 for speculation, selects a brokerage firm and registered representative, opens an account, and deposits funds. For prudence, he opts to trade GBP first, venturing into other markets only after gaining experience.

It’s October, and a UK economic recession has driven GBP rates down. However, he believes the current price already reflects the recession’s impact, with no further downside. He anticipates the recession’s end and a potential GBP rebound. Data suggests the downtrend has halted, which he interprets as a bullish signal, prompting him to buy GBP.

Further analysis reveals a narrow profit-loss ratio and prolonged timeline, so he decides to exit swiftly for other opportunities. He caps his GBP loss at $1,000. His focus now shifts to capital preservation rather than exchange rate movements. His trading memo states: "If neither profit target nor stop-loss is triggered by [date], close the position."

For such a simple trade, this level of planning already surpasses what most traders implement. Little wonder why many lose money in forex futures.

Winners and Losers in Forex

In forex, fortunes are made or lost in moments. Amidst these swings, a question arises: How many win, and how many lose? Brian Steward, a renowned analyst of speculative records, studied profit-loss distributions in futures markets. His analysis of 8,746 brokers revealed:

• 75% were losers (6,598 vs. 2,148 winners).

• Total losses hit ~$12M, dwarfing winners’ $2M profits.

• Dollar loss-to-profit ratio: 6:1!

The distribution also showed modest outcomes for most:

• 84% of winners earned ≤$1,000 over nine years.

• Large speculators fared no better than small ones—though limited sample size calls for further validation.