The number one reason traders lose money is leverage. You know you hear all about leverage and how wonderful and great it is, but leverage only adds value to traders who are already consistently profitable and disciplined traders. The bottom line is, the FX market attracts the undercapitalized trader. You give leverage to a guy that can't trade and he has zero chance of making it. So really, it not only applies to FX traders but also to guys that trade Crude, Natural Gas and even GOOG. There is no way around this. Most traders don't have the emotional capacity to deal with the gearing involved in highly leveraged instruments. There is nothing inherent in the actual product itself. For example, you can trade the FXE, which is an ETF on the Euro against the dollar. It trades just like a stock. If most of the guys would trade that instead, they might actually make money, just not very much because it is highly de-leveraged. When one is learning how to trade, they should trade the least leveraged instrument they can find. The problem is FX attracts all the newbies either from late night infomercials or from the onslaught of new FX books hitting the bookstores. There is nothing intrinsically harder about FX to trade over say bonds or index futures. But with hyper leverage involved, 99% of the guys don't stand a chance. They will never admit, they will just slowly fade away with the money in their account.
It does not matter if you are trading direction, volatility, or a spread price, there is nothing easy about trading. Trading a spread is no easier then trading direction. In fact, it's harder. Usually when a spread goes against you, you have no reason why it's going against; you just know that it should trade within a certain band. You don't understand it except you believe it should. At least if you are long or short the stock at certain levels, you have an idea why you are wrong if you get stopped out. Also, when spreads go against you, they can explode against you. They can get very violent. In fact, the irony is they are actually much more volatile than the actual indices themselves. It's incredibly difficult because you are driving the car but you don't know what's underneath the hood and if the car breaks down, you don't know why. You are basically driving blind. It's not technical or fundamental. It's all stat correlation. Firms have 100 PHD's quants writing all sorts of very complex stat correlation models that they adjust every day. It's not as simple as saying, oh the spread is too narrow, I think I'll buy it. The hedge funds that trade this way spend millions on research and millions more on technology to create their stat correlation models. That's why it’s humorous when guys think, oh this looks easy. Just trade the spread, you don't care which way the market goes. Guys, it's not that easy. You better be very well versed in statistics and programming if you want to have a go at this. Because ma and pa kettle are not the ones taking the other side of these trades. It's the super traders that you are trading against.