Trading isn’t for everyone. Learn why the majority of traders lose, and how you can improve your chances of trading profitably.
The distribution of trader outcomes, again in the absence of transaction fees, can be visualised as a bell curve centred on zero. Relatively large numbers of traders will register a small profit or loss, and relatively small numbers of traders will register a large profit or loss. Overall, in this hypothetical fee-free case, there would be equal numbers of profitable and unprofitable traders either side of the zero P&L axis:
Transaction fees form an inevitable part of trading for all market participants, from private individuals to the largest banks and hedge funds. The fact that trading is not free of costs shifts the bell curve to the left. This leads to the typical results seen for all short-term speculative products – including CFDs – where the average trader P&L is a loss equal to the sum of transaction fees paid, and where the majority of traders lose.
For CFD traders, results vary across firms and preferred underlying asset classes. But typically 75-80% of traders tend to lose, and 20-25% of traders tend to win over the course of a year:
You should consider overnight funding charges and commissions, as well as the spread, when selecting a provider. Some providers boast of very tight bid/ask spreads but charge large overnight fees. Some, particularly in the FX world, market ‘no dealing desk’ services with minimal bid-ask spreads – but charge significant commissions on transactions. IG strives to offer some of the most competitive and transparent transaction fees in the market.
From a trader’s point of view, poor execution is economically equivalent to additional hidden transaction fees. If your provider offers low transaction fees but is unable to reliably fill your order, you should consider choosing a provider with better liquidity and a more robust execution algorithm. At IG we offer some of the deepest liquidity in our industry, with a policy of delivering price improvements to our clients whenever we are able.
It is rarely a good idea, for instance, to take small profits or losses only slightly larger than your transaction fees. Frequent trading in this manner, often called scalping, will tend to push your overall result toward a loss unless somehow justified by the underlying dynamics of a specific market. At the other end of the spectrum, swing trading attempts to capture gains in a market between an overnight hold and several weeks, minimising the times you pay the spread.
You should have a clear idea of the following ahead of placing a trade:
You should have the discipline to stick to your plan as events unfold. Disciplined trading maximises your exposure to a chosen strategy and market while minimising the number of trades placed, and hence the sum total of transaction fees paid.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider.You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.