Forex returns come from exchange-rate moves and interest-rate differences, magnified by leverage, in a market that is roughly zero-sum before costs and negative-sum after them.
12 min read · Level 5
Forex is sometimes presented as the most accessible market because it is large, liquid and open around the clock. I think those features say nothing about whether an individual can profit in it, and the zero-sum structure says a great deal. Without a durable edge over the banks and funds on the other side, the expected result for a retail trader is the costs, and leverage just makes the costs arrive faster.
There are two sources of return in a currency position:
Source How it works Exchange-rate move the pair's price rises or falls Interest difference holding a higher-rate currency against a lower-rate one pays; the reverse costs
The second is the carry: brokers credit or charge rollover interest each day a position stays open, based on the two currencies' interest rates, less the broker's markup.
Leverage turns small moves into large results. Suppose a retail trader buys 100,000 euros at EUR/USD 1.1000 - a position worth 110,000 dollars - with leverage of 30 to 1:
Position value 110,000 dollars Margin at 30:1 3,667 dollars 1% move against -1,100 dollars 30% of margin 3.33% move against -3,667 dollars all of the margin
A currency moving 1% in a day is unremarkable. At this leverage it removes nearly a third of the trader's money.
Unlike shares, which can all rise together as companies grow, currency trading is roughly zero-sum: if one currency strengthens, the other in the pair weakens, and every trader's gain is someone else's loss. Spreads, commissions and financing costs are taken out on top, making the market negative-sum for traders as a group.
Because the zero-sum nature changes the odds. In share investing, a patient, diversified investor can earn a return simply from the economy growing. In short-term currency trading there is no such tailwind; to profit, a trader must consistently outperform other participants, including banks and professional funds, after costs.
It also explains why leverage is so dangerous here. Exchange-rate moves are normally small, so products offer high leverage to make them interesting - which makes ordinary volatility capable of wiping out an account.
This is educational information, not investment, securities or financial advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: U.S. CFTC - Commodity Futures Trading Commission; UK FCA - information for consumers; FINRA - Investor Insights
A carry trade, and how it can unwind. A trader buys a high-interest currency against a low-interest one, earning a rate difference of about 4% a year on the position.
On 110,000 dollars of exposure held for a year, that interest difference is roughly 4,400 dollars before broker markups, on around 3,667 of margin at 30:1.
Then the high-rate currency falls 5% against the low-rate one during a period of market stress:
Carry earned (approx) +4,400 Exchange-rate loss -5,500 Net -1,100
A year of steady interest was more than erased by one move - and in a fast fall the trader's margin would likely have been called before the year was out.
Treating interest income from a carry trade as safe. Higher-rate currencies can fall sharply, often when markets are stressed, and those falls can exceed years of interest.
Divide margin by position value. At 30:1 it is about 3.3%; at higher leverage it is even smaller.
Ask your broker what you earn or pay each night for holding the position, including their markup.
Before trading, ask what advantage you have over professional participants that would make you a net winner after costs.
When evaluating any leveraged currency product or a strategy promising returns from interest differences.
Do not use the illustrative interest rates or moves as forecasts. Real rates, spreads and volatility change, and moves can be far larger than in these examples.
Carry trades that borrowed in low-interest currencies to hold higher-yielding ones have experienced sharp unwinds during periods of market stress, including during the 2008 financial crisis and more recently in August 2024, when a rapid strengthening of the Japanese yen was widely reported to have forced traders out of yen-funded positions.
Interest differences are paid slowly and currency reversals happen quickly. Size carry positions for the reversal.
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