CFD Traders: Why do most CFD traders end up losing money?

Trading Forex and CFDs is a zero-sum game. Money doesn’t just appear here by magic; it just moves from the accounts of traders to those of brokers. And all over the place. In this article, you will learn if traders make money or lose money and how likely it is that you will make money if you trade.

One must lose for the other to win. Sense, right? So, it makes sense that for every trader who makes money, there is one who loses money. This means that half of the CFD traders make money and half lose money.

But that’s not how it works.

The 90/90/90 rule shows that trading is a tough business:

90% of new CFD traders lose 90% of the money they put into their accounts in the first 90 days.

There is one big problem with the 90/90/90 rule. It is a general phenomenon that is used to describe various phenomena – and not only in the field of finance. It’s kind of like the 80-20 rule. In short, there is nothing to back up such a claim, and anyone can question it.

So let’s see what the real data reveals about the success of traders.

The average trader loses thousands of euros

The European Securities and Markets Authority did the most in-depth study (ESMA). Between 2009 and 2017, the second group got information from 10 regulatory agencies that kept an eye on dozens of European brokers and hundreds of thousands of trading accounts.

And what happened was scary.

About 80% of small investors who traded CFDs lost money, and the average loss was more than €2,000.

The traders who signed up with Cypriot brokers lost the least, which is good news for us. CFD brokers who do business in the Czech Republic often go to Cyprus. On the other hand, clients of French brokers lost an average of €10,900, which was the most.

After a year of business, the share of loss accounts
We need to point out that the information comes from brokers who are regulated. Accounts with unlicensed brokers are more likely to lose money because they use aggressive telemarketing, offer very high leverage, and are often linked to fake ads that promise profits that can’t be reached. Fair question. The mentioned studies are out of date, and since they were published, a lot has changed.

HOW IS IT RIGHT NOW?

A number of steps have been taken by the European Securities and Markets Authority (ESMA) to protect retail traders. This could mean, for example, that the leverage effect is limited or that accounts must be protected against debt. Also, brokers have to say what percentage of their clients have lost money in the past year. You can find out how much salespeople at a certain company make.

The following was said by brokers in January 2022:

Accounts for loss
As you can see, about 70% of CFD traders are still making money, so not much has changed.

And how much do people usually lose?

We don’t have any exact numbers, though. But the UK Financial Conduct Authority (FCA) thinks that the new rules will save CFD traders between 267 and 451 million pounds every year [2]. This is just in the UK! By doing some simple math, we can see that traders’ average losses are about a third less than they used to be.

Why do most traders fail in CFD trading?

IGNORANCE

Even though it’s hard to believe, a lot of CFD traders think they are trading on a real exchange. Especially those who got into trading because of ads on social networks or because brokerage firms called them.

Every trader should understand how CFD trading works, what the risks are, and how to use financial leverage. These are the most important things you need to live.

UNREALISTIC EXPECTATIONS

Beginners think they’ll make hundreds of percent every year. But this kind of return is only possible with a very risky strategy. And everyone knows that it will fail at some point.

The sad truth is that most traders don’t do better than the average 10% annual return of the US stock market.

TRADING ON EMOTIONS

Emotions have nothing to do with trading, but everyone has trouble with them. When things are going well, we usually want more and take more chances. When things don’t go well, on the other hand, we are too careful, closing deals too soon or not entering them at all.

If you can’t keep your feelings in check, trading becomes a risk. And when that happens, the odds are against you.

SEARCH FOR SHORTCUTS

Scammers and fraudsters are drawn to the online trading industry like flies to honey. Most of them show off expensive goods and say they can help you make a lot of money. Quick, no work, and no danger. Don’t take any similar offers, because that’s not how trading works.

Also, be wary of brokers who call you on the phone without being asked. Business managers will tell you almost anything to get as much money as possible from you.

Either responsibly or not at all

CFD trading is good for brokerage firms in particular. This tool is very risky for traders, and most of them lose money when they use it. Either because of financial scams or because short-term trades and financial leverage are a lot like gambling.

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