OANDA's high profitability numbers explained – include interest

25 Comments on this post

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1. Richard said:
   That formula is all well and good, but I thought dormant accounts were meant to be excluded?
   I guess either Oanda will have to adjust their reports in future, or competition will induce other brokers to start paying interest.

   November 19th, 2010 at 8:23 am
2. Arnaud said:
   and that’s why they have so many active accounts

   November 19th, 2010 at 8:49 am
3. Arthur said:
   The cheesy part is that they are now marketing this number on their website. So they pay a $1000 account $2 in interest in the quarter and they count the guy as profitable even if he doesn’t trade? Give me a break.

   November 19th, 2010 at 11:42 am
4. Richard said:
   OANDA is totally correct in their calculation. They have the most honest way of handling interest on accounts. Perhaps the other brokers should start follow suit if they are really interesting in the needs of their clients.

   November 19th, 2010 at 12:30 pm
5. Fred said:
   Talk about a strawman argument. How can anyone believe a couple percent interest vs trading tens, hundreds, thousands of dollars is actually going to make a difference? If they included dormant accounts just collecting pennies in interest that’s a different story but they didn’t.

   November 19th, 2010 at 1:17 pm
6. Michael Greenberg said:
   i’d say this will make most brokers start paying interest on accounts not because they are decent but because they’d want to improve their stats

   November 19th, 2010 at 1:25 pm
7. Arthur said:
   Fred-

   That’s exactly what they did. If an account is paid interest, it is not counted dormant under the rules.

   November 19th, 2010 at 3:03 pm
8. Paul Jeszenszky said:
   I’d like to start by saying that OANDA welcomes this discussion.

   If the CFTC profitability measures encourage more dealers to provide fair interest payments – ideally both on open trades and on account balances – then that is a great result for the industry. OANDA has always handled interest this way however, so I want to make sure its clear this is not a gambit on our part intended to take advantage of current or future regulation. Treating clients fairly is our business model.

   In terms of the impact of interest, as many traders have said, its not going to be the factor that makes or breaks a traders profitability. The factor which is larger than interest, in my opinion, are the fees charges by other dealers which are often hidden in the fine print. These can include account setup fees, inactivity fees and volume threshold fees – all items OANDA has never charged. For example, if you don’t make a trade in a given month is your account dormant or inactive? Not all forex trading strategies are intraday and many extend across longer periods of time (i.e. carry trade). However, many dealers charge an inactivity fee after a month. There are also trading volume fees. If you trade conservatively in a given time period, possibly to manage risk in volatile markets, you are punished. These types of fees can hurt trader profitability and a few months of say, $50 fees for “inactivity” plus another fee based on trading volume, can erode profitability. Further, these types of fees seem to be pushing traders to take more risk since they will lose the money in fees if they don’t trade.

   So outside of interest payments, OANDA would like to see more dealers treat clients fairly and do away with these types of fees. The question is – will they want to give up the money from doing so?
   We do so and I believe we have the lowest spreads of any forex dealer – so its more than possible.

   In response to accounts with small balances: OANDA has only one type of account because we believe in fairness and equal access to prices, information and of course interest payments. There is no differentiation of clients access to these things based on size of the account or trading frequency. This is because our main goal is to make forex accessible to all and give each trader the equal opportunity to reach their goals. Whether traders achieve these goals is in their own hands but it seems apparent that a number of other factors can influence this.

   November 19th, 2010 at 4:43 pm
9. John said:
   Still the accounts were profitable, no one can say else. I hope other brokers will do like Oanda and start paying interest on accounts.

   Oanda is the best!

   November 20th, 2010 at 2:34 am
10. Bill said:
    Michael

    Have you checked with Oanda and verified they are including dormant accounts? I agree there is a discrepancy somewhere but Oanda has told others who have inquired that they are not including dormant accounts.

    As far as others possibly paying interest in order to improve stats: Who cares what their motive is? This anticipated competition between brokers will benefit traders, whatever their motive.

    But until all brokers tally their results in exactly the same way, the figures are meaningless.

    November 20th, 2010 at 3:00 am
11. DojiSan said:
    I love Oanda because they pay interest on “dormant” accounts unlike some brokers like Alpari or GFTForex where they will deduct up to as much as $50 per month if the account becomes inactive after 3 months of no trading! Which sucks! Oanda also has the best spread and fast fills.

    November 20th, 2010 at 7:10 pm
12. Michael Greenberg said:
    i’ll let Paul answer that

    November 20th, 2010 at 7:33 pm
13. Lup said:
    hi Paul,

    thank you for responding. in my opinion, this new cftc reg is attempting to disclose to traders:

    1. that dealers are counterparties and can profit when the trader loses and;
    2. that this causes a conflict of interest

    the cftc is requiring this profitability disclosure so the retail traders can understand that dealers win around 70% of the time and lose around 30% of the time – TRADING! – If you disagree with this statement, then perhaps you should explain to us the principle of the cftc reg.

    Oanda first ever marketing attempt may have harmed its stainless reputation by doing exactly what they are pointing a finger to others for, and that is not being honest and finding misinforming the public. interest account is not TRADING! there is such minimal risk in collecting interest, and the cftc reg is written to disclose RISKS! by manipulating the argument and the numbers, what your company’s marketing department has done is minimized the risks of trading forex. i am not an attorney but that should be a serious violation of US Regulations.

    all other dealers understood the principle of the reg and the numbers are all insynch. not only has Oanda manipulated the numbers, but on top of that made the fatal mistake of creating a marketing campaign using those same numbers. that is not treating your clients fairly, that is just plain cynical. years of building a great reputation may have been jeopardized by attempting to monetize honesty.

    i am being a bit harsh, but i do want to state that i do believe in your company, and i do believe in most of the things that you guys stand for. i just think that the trader is not being protected due to the self interest of the dealers, the conflict of interest that exiist in self regulation and the incomptent US government institutions (cftc). i think the trading community will really appreciate it if Oanda revised its numbers and discloses to the public what it believes is fair to its customers, and abides by the spirit of the regulation.

    thanks again.

    November 21st, 2010 at 6:55 am
14. Asaf said:
    The actual intent of the CFTC was not to expose the brokers that trade against their customers but to warn customers against the low probability of making money in FX.

    The reality is even if you tell a trader that 90% of the traders lose money he would still be convinced that he is amongst the 10% that would make money. So this additional information serves no real purpose.

    As a side note – being a market maker, which all the brokers in this space are, does not mean that the broker does not make money if the traders make money.

    The existing market making technology in this space is very primitive when compared to market making technologies in other spaces like equities or futures and most brokers, especially the MT4 ones simply don’t execute trades as a mean of market making but it can be significantly improved to a place where the broker makes a lot of money and traders are successful.

    – Asaf.

    November 21st, 2010 at 11:31 pm
15. Lup said:
    Hello Asaf,

    Good point. You are correct when you say:

    “The actual intent of the CFTC was not to expose the brokers that trade against their customers but to warn customers against the low probability of making money in FX.” However, I must note that exchange traded contracts do not need to disclose these numbers to the public and the probability of succeeding in exchange traded contracts are about the same as with retail OTC forex trading. Hence, in my opinion the CFTC disclosure is due to what you noted because the dealer is the counterparty to a retail trader and may profit from traders loses.

    November 22nd, 2010 at 7:49 am
16. Paul Jeszenszky said:
    Hi Lup,

    I understand your argument and I appreciate it. Internally we always debate issues and as you mentioned, we take our reputation very seriously.

    The reason we went forward with this campaign is simple: We believe the cause for the large variation in account profitability numbers between dealers has to do with business model choices. And when I say this I don’t refer to something as simple (but important) as fair interest payments. OANDA is on top of the list because we do things very differently and this makes it clear. Frankly, even if people are cynical about the results they at least start to ask the tough questions. The proof for me is seeing many of the comments in this thread asking the tough questions. And once you do that the differences between the dealers becomes apparent. This is something I believe in and stand by.

    The other thing I’ve read a lot about is how the rest of the dealers are within the same range of profitability. I’d respectfully disagree with you. There is ~10% difference between the rest of the pack. That is up to a 50% difference in account profitability (i.e. 33% is almost half or 50% higher than 23%). Statistically that is significant. What causes that?

    In terms of tough questions, if you’ll indulge me for another moment I’d like to point out this document on the OANDA fxTrade website – Tough Questions for Forex Brokers (http://fxtrade.oanda.com/documents/ToughQuestions.pdf)
    There are lots of solid issues for debate in these questions, probably half of which have already been touched on here. Food for thought?

    November 22nd, 2010 at 12:46 pm
17. Asaf said:
    Lup,

    The profitability of the traders with a broker depend more on the type of traders the broker attract than the actual technology. For example a broker that offer free $50 will most likely lose all of these accounts and a broker that leverage word of mouth and doesn’t advertise that much will get less customers but higher quality.

    As far as technology goes – it does not impact the people that don’t know how to trade.

    – Asaf.

    November 22nd, 2010 at 2:16 pm
18. Lup said:
    Gentlemen,

    2006-

    http://championship.mql4.com/2006/users

    Total Participants: 258
    Total Accounts Over 10k: 44
    Profitability Ratio: 17%

    2007 –

    http://championship.mql4.com/2007/users

    Total Participants: 603
    Total Accounts Over 10k: 91
    Profitability Ratio: 15%

    2008 –

    http://championship.mql4.com/2008/users

    Total Participants: 705
    Total Accounts Over 10k: 128
    Profitability Ratio: 18%

    2010 – Ongoing –

    http://championship.mql5.com/2010/en/users/index

    Total Participants: 314 (2 disqualified)
    Total Accounts Over 10K (Equity): 106
    Profitability Ratio: 34%

    The above is a sample of traders participating in MT4 contest who use an automated strategy. This can be considered one of the most sophisticated groups in the industry as they are educated enough to write code, have a set strategy, and attempt to measure risk by using a money management coded plan. As you can see from the above sample, the profitability ratio does not even come close to Oanda’s numbers plus they are in synch with the rest of the US Dealers disclosing such information.

    I read the reasoning for why the numbers from Oanda are skewed, as you state, “business model”, but unless you are making the decisions for the traders and tipping them on what to buy or sell, then I don’t know and can’t explain your numbers. The ratios 70%/30%, in general, is not a “statistical law” only in Forex, it is across all markets: Equities, Futures, etc. There is a saying in financial markets where most believe that “95% of traders lose” money – that is a common statistic -google hits 14,300 pages – (http://www.google.co.uk/#hl=en&biw=1243&bih=778&q=%2295%25+of+traders+lose%22&aq=f&aqi=&aql=&oq=&gs_rfai=&pbx=1&fp=f1f3f29e80c842e4).

    Oanda reasoning and their list of tough questions to the dealers do not reveal to me how traders can be profitable +20% more with them and their “business model” then trading in any other financial instrument.

    Thanks -

    November 23rd, 2010 at 8:10 am
19. Jim Hunt said:
    Hi Lup,

    As the author of one of the entrants in the ongoing 2010 MetaTrader Automated Trading Championship I’m not really sure that you can extract anything terribly meaningful from your figures.

    I wouldn’t personally class MetaTrader contest EA writers as a whole as “one of the most sophisticated groups in the industry” for example. Note also that this years contest is for MetaTrader 5, not MT4.

    Our own particular “robot” entered the contest still carrying the odd known bug, because we found ourselves spending considerable amounts of time programming around “features” in the beta version of MT5.

    Finally most of the contestants got disconnected from MetaQuotes servers at one point during the contest:

    http://championship.mql5.com/2010/en/news/35

    Cheers,

    Jim

    November 23rd, 2010 at 2:36 pm
20. Paul Jeszenszky said:
    Hi Lup,

    I see the point you’re trying to make but you’re losing me with your current examples as it is now a comparison of apples to oranges.  

    First off, the numbers you’ve listed are quite a bit outside (by 50% to 100%) of what you call the standard range for profitability. The only year inline with the CFTC profitability numbers is 2010 and the contest is not over yet.

    Second, 14K results on Google is a really small results set. It sounds impressive until you put it up against another set of search results, like “forex” with 307,000,000 results.

    Finally, I think it is pretty common knowledge that people who participate in trading contests take on a higher risk profile in order to try to hit a large return multiple in a short period of time. This is why the only contests OANDA has been involved in use the practice or demo accounts.

    As you called out, one of the biggest take aways from the profitability disclosure is the death of the 95% losing traders myth, even the dealers with lowest profitability numbers disprove that statistic and now thanks to this exchange we can all point to the MT4 contest results as well.

    At OANDA we know that over a period of several years, in the range of ~58% of the trades our traders make are profitable (the definition of which is when they closed the individual trade their P/L was showing an increase not a decrease). However, traders tend to lose more when the trade goes against them than they make in profit. What makes it truly interesting however is that if the spread was slightly lower – and of course if you remove the extra fees and overhead some dealers charge – then more individual trades end up on the positive side of the P/L ledger. Many traders are missing profitability by a few pips or breaking even as they swing back and forth from profit and loss. That is what the tough questions PDF is addressing between the lines. All the things mentioned in that document do make a difference.

    I would recommend participating in a site like Currensee  or MyFXBook  (make sure you look at live accounts not demo accounts) and look through some trading history (including your own) and see during unprofitable periods how much of the loss could have been stemmed by a slightly lower spread, good execution (perhaps that requote or slippage that goes against you more than for you) and no fees. Add some interest (paid and charged) into your balances as well and see how much that impacts your final results.

    At OANDA our ideal world is to keep finding ways to lower the cost of trading so that more traders come out on the positive side of the P/L equation. Our business model is based on making money from tiny spreads on large volume. Using straight, simple logic: if a trader keeps trading longer, we’ll make more money because more volume will be traded. So in that regard, our interests are aligned with keeping traders active and on the right side of P/L.

    November 23rd, 2010 at 4:11 pm
21. Jim Hunt said:
    Hi Paul,

    “I think it is pretty common knowledge that people who participate in trading contests take on a higher risk profile in order to try to hit a large return multiple in a short period of time.”

    I agree.

    “One of the biggest take aways from the profitability disclosure is the death of the 95% losing traders myth”

    I disagree.

    “Even the dealers with lowest profitability numbers disprove that statistic”

    No they don’t!

    I’m sure you know your own numbers inside out, but the fact that 23% of FXCM LLC’s clients were apparently profitable in Q3 2010 is a very long way from proving that more than 5% of FXCM’s clients were profitable over 2010 as a whole, let alone over 5 or 10 years.

    Perhaps you wouldn’t mind taking a look at my critique over at:

    http://trading-gurus.com/fxcm-release-extra-forex-trader-profitability-statistics/

    Please feel free to then tear my analysis to shreds based on your intimate knowledge of Oanda’s own statistics.

    Jim

    November 23rd, 2010 at 5:29 pm
22. Asaf said:
    Jim,

    We’ve analyzed thousands of accounts over a period of more than a year and the statistics are pretty similar – about 25%-30% of the traders are making money in forex. These figures would have been increased to around 35% if the broker took 1 pip less by the way.

    Having said that, when we look for trade leaders, we look for people that are consistently profitable and carry relatively low risk we find that it’s below 0.5% of the traders that qualify. Being profitable as a whole is not enough to call yourself a successful trader.

    – Asaf.

    November 29th, 2010 at 10:54 am
23. Dan Eylon said:
    Paul, can you just be direct and explain how do you calculate the numbers? what accounts do you include etc? i believe this will answer all the questions.

    November 29th, 2010 at 6:32 pm
24. Jim Hunt said:
    Hi Asaf,

    Just checking if I’ve understood those figures correctly.

    25%-30% of the traders you monitor are profitable (where profitable means making $0.01 or more profit over a 12 month period?)

    In your estimation, based again on the results achieved by the traders you monitor, only 0.5% have got what it takes to achieve the (almost mythical?) status of being able to “give up the day job” and earn a living from trading forex over a period of several years, or even decades?

    Have I got that straight?

    Jim

    November 29th, 2010 at 7:37 pm
25. Asaf said:
    Jim,

    25%-30% are profitable over the course of a year which means their overall G&L was positive.

    As for the 0.5% – these are people that we select to the Trade Leader program – means that they not only have to be profitable but they need to be consistently profitable which means they make money month over month. They also need to have low volatility meaning that they can’t lose too much (more than a few percentage) in one day and also can’t make too much in one day.

    This does not mean that these people can quit their day jobs and make a living out of trading alone because their returns are around 10% to 50% a year which means that if they need $100,000 a year in order to live they would need to have between $200K and $1M in their trading account. I can tell you that anything above 30% a year is on the borderline of being unsustainable and is usually accompanied with more risk than we can tolerate.

    – Asaf.

    November 30th, 2010 at 10:00 am