A recent report shows that retail investors
are pulling out of equity markets
at an accelerated pace. Alright, let’s take a giant step back here. This report focuses on the BRIC
which stands for Brazil, Russia, India and China. Retail investors have added to the boom in equity trading and they have enjoyed 14 years of world-beating economic growth
The economic boom has added to the value of equity markets in those regions and therefore retail traders have flocked to those markets and enjoyed the ride higher in the value of assets. Some may argue that a new emerging market
equity bubble was created. A growing number of BRIC retail traders started to rely on income generated from their equity trades.
Over the past four years BRIC has underperformed and traders as well as investors saw their portfolio’s contract. Some witnessed losses in excess of 70% over the past half-decade which crushed their confidence in their respective equity markets. Trading in Brazil has contracted to the lowest level since 1999, Russian mutual funds
saw withdrawals for 16 consecutive months which has not been seen since 1996, and India faced the biggest withdrawals in two years while Chinese investors closed out two million equity accounts in the past twelve months alone.How is your currency trading?
True, this report focuses on equity trading. This data is important as traders who relied on equity trading
income to finance themselves are now left which substantially lower account which makes forex trading
the only natural choice. The entry level for a profitable forex strategy
is much lower than what it would be for an equity strategy.
The outflow of capital from equity accounts is partially attributable to the increase of capital in forex accounts. Traders seek to not only diversify, but can use income generated in forex accounts
to bolster their equity trading. The attractiveness of forex trading is a combination of low capital requirements and increased leverage on portfolios; just keep in mind that leverage works both ways and can increase your profits as well as your losses.
Due to the decrease in capital plenty of equity strategies become dysfunctional and the deterioration in confidence adds to outflows of accounts. Traders now have less capital, but can’t afford not to trade which means that plenty of traders will move to forex trading.Here is a simple example
- Standard Equity Account (there is no leverage on a standard equity account which us the most widely offered account by equity brokers to clients); $10,000 equity account in order to execute an appropriate equity trading strategy. Trader is able to earn 5% per trade and on average gets six out of ten trades correct. Trader also exits losing trades at a loss of 5%. Trader places ten trades, records profits on six trades worth of $500 or $3,000 total and four losses of $500 or $2,000 total. This translates into a net gain of $1,000 for the trader.
- Standard PaxForex Trading Account (leverage of 1:500); $500 forex trading account in order to execute an appropriate forex strategy which will give the trader the ability to trade with $250,000 in the forex market. Let’s say our trade continues to get six out of ten trades correct and makes 1% per trade and keeps losses capped at 1% as well. This would translate into our trader earing on six trades $2,500 each or $15,000 total and four losses of $2,500 each or $10,000 total. At the end of the day our trader earned $5,000.
The above example is a simplified example in order to illustrate the main benefit of forex trading in comparison to equity trading.What should you do next?