Systematic trading

Why people trade forex, and what the numbers say about retail results

Systematic trading · Published 2026-10-23

The foreign exchange market is the largest financial market in the world, open around the clock on weekdays and accessible to almost anyone with an online account. Those features attract many new traders, often through advertising that promises freedom and fast profits. This article explains how the market works, what systematic research has found in currencies, and what regulators' data show about how retail traders actually fare.

The size and shape of the market

The Bank for International Settlements surveys foreign exchange activity every three years. Its 2022 Triennial Survey put average daily turnover at 7.5 trillion U.S. dollars in April of that year. The U.S. dollar was on one side of about 88 per cent of all trades, reflecting its role as the main vehicle currency. Most activity is between banks, other financial institutions and corporations, through spot transactions, forwards, swaps and options. London is the largest trading centre, followed by New York, Singapore and Hong Kong.

Retail trading is a small share of that total, and retail traders do not trade in the interbank market directly. They trade with brokers who quote prices and often take the other side of their positions or pass them on to larger liquidity providers.

Who trades currencies, and why

• Companies exchange currencies to pay for imports, receive export revenues and hedge future cash flows.
• Investors buy currencies to invest abroad and hedge the currency risk of foreign assets.
• Central banks manage reserves and sometimes intervene to influence exchange rates.
• Speculators, from macro hedge funds to individuals, seek to profit from exchange rate movements.

How quotes and leverage work

Currencies are quoted in pairs. In EUR/USD at 1.0850, one euro costs 1.0850 U.S. dollars; the first currency is the base, the second the quote currency. A pip is traditionally the fourth decimal place for most pairs (the second for pairs involving the Japanese yen). The broker quotes a bid and an ask; the difference, the spread, is a cost on every round trip. Positions held overnight in rolling spot or CFD products incur or earn a financing charge reflecting the interest rate difference between the two currencies.

Because daily currency moves are usually small, retail products offer leverage. With 30:1 leverage, a 1 per cent move against a position wipes out 30 per cent of the margin committed to it. Leverage is the main reason retail currency trading is risky, and the reason regulators have limited it.

What systematic research has found in currencies

Academic and practitioner research has documented a few persistent patterns in currency returns, which form the basis of many institutional currency strategies:

• Carry: buying high-interest-rate currencies and selling low-interest-rate ones. Uncovered interest parity predicts that the high-yielding currency should depreciate enough to offset the interest gap; empirically, on average it has not, which is known as the forward premium puzzle. Carry trades earn the gap most of the time but suffer sharp losses in risk-off episodes, as studied by Brunnermeier, Nagel and Pedersen (2009).
• Momentum: currencies that have appreciated recently tend to keep appreciating for a while; Menkhoff, Sarno, Schmeling and Schrimpf (2012) documented sizeable currency momentum returns, concentrated in less liquid currencies. Time-series momentum in currency futures is part of the evidence in our momentum overview.
• Value: currencies that are cheap relative to purchasing power parity tend to appreciate over long horizons.

Asness, Moskowitz and Pedersen (2013) found value and momentum in currencies as in other asset classes. These are portfolio strategies across many currencies with risk controls, quite different from trading one pair intraday on high leverage.

Shocks: the Swiss franc in 2015

On 15 January 2015, the Swiss National Bank unexpectedly abandoned the minimum exchange rate of 1.20 francs per euro it had defended since 2011. The franc appreciated by around 30 per cent against the euro within minutes before settling lower. Liquidity vanished, stop-loss orders were filled far from their levels, and several retail brokers suffered heavy losses or failed because clients' negative balances exceeded their deposits. The episode is a reminder that currency risk includes jumps that no stop-loss can contain.

What regulators found about retail results

In 2018 the European Securities and Markets Authority (ESMA) adopted product intervention measures on contracts for difference (CFDs) offered to retail clients. ESMA's analysis of data from national regulators found that between 74 and 89 per cent of retail accounts typically lost money on these products. The measures limited leverage, to 30:1 for major currency pairs and 20:1 for others, introduced margin close-out rules and negative balance protection, and required brokers to display the percentage of their retail accounts that lose money. Those warnings are still visible on European brokers' websites today. In the United States, the CFTC limited retail forex leverage in 2010 to 50:1 on major currencies and 20:1 on others.

Reasons people trade, examined

• "The market is huge and liquid." True for the interbank market, but retail traders still pay spreads and financing, and liquidity can vanish in shocks.
• "It's open 24 hours." Convenient, but it also means positions move while traders sleep.
• "You can start with little money." Only through leverage, which magnifies losses as well as gains.
• "Professionals make money trading currencies." Some do, with diversified systematic strategies, research teams, low costs and risk limits, which is a very different activity from discretionary leveraged trading on a phone.

Readers interested in the systematic side should start with how strategies are tested in our strategy creation guide and how risk is sized in choosing your risk.