Individual Currency Traders’ Risk Reward Conundrum
Senevirathne, Kodithuwakku Sampath Prasanna
Cardiff Metropolitan University
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The literature on retail currency trader performance with respect to the risk they take concludes very much similar to equity investing. These literatures bring forward the argument for excess leverage, excessive trading, and disposition effect as the main causes for under significant level of underperformances by retail traders. This paper further examines that argument in the context of traders’ profitability. This study tests the risks parameters that have been advocated in literature to a data set obtained from an online currency trader networking platform. This study also confirms the prior research on adverse correlation between the risk and performance. However, initial finding of the study reveals that the performance of traders varies greatly across the entire population of traders’, hence the population was categorized into quintiles based on the comparable performance. The quintile analyses reveal that the effect of risk is different from one group of traders to another. This paper argues that depending on the trader sophistication the effect of the risk varies. Therefore this paper suggests that there are certain risk factors important at different state of a trader than generally advocated as a general principle. As the trader starts making profit from the market his focus should be shifted to other risk factors.
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