Everybody who trades financial markets needs to asses performance. This is typically done by comparing results to some kind of benchmark established for the markets of interest. For equities in United States this could be Dow Jones Industrial Index or S&P 500 Index. For foreign stocks that would be similar, local index. Futures traders can track CRB Index or one of the other averages trying to reflect general movement of these markets as a whole. Bonds and other financial instruments have benchmarks of their own.

Currencies are a notable exception. There is the US Dollar Index, tracking movement of USD against a weighted basket of few other currencies. It is rather limited in scope, with relatively narrow focus and doesn’t reflect interaction among currencies other than the Dollar. Year during which USD has strong gains would show a rise of the Index, but it wouldn’t be a good representation of total Forex activity. Fair share of trading is done outside of US Dollar. This portion of the market is growing and will likely to increase even more in years to come. Other similar indices tracking individual currencies have the same limitations.

With the lack of universal measuring yardstick, Forex traders can only judge their performance by comparing to how other market participants are doing. Statistics are compiled using returns of those who report their returns. These would be currency trading hedge funds, bank trading programs, CTA’s and other institutional players. Data received from these sources is used to create indices, which can be used for comparison purposes. One of them is the Barclay Currency Traders Index.

In 2009 there were 124 managed currency programs included in the index, which probably is a good sample of total institutional funds engaged in Forex trading. Figures for last year might not be final yet, but shouldn’t change by more than a fraction of percentage point. As we can see 2009 proved to be a difficult year for managed funds trading currencies. BCTI shows only 0.55% return for the period, very small indeed. From a practical standpoint, it was a flat, break-even period for the pros.

Entire decade was weak. During last ten years only 2003 brought double digit returns with 2005 and 2006 being in the red. It seems currency trading is difficult, if even best pros, with every possible advantage of research and technology, have hard time producing meaningful results. Hard to say why they are so low. Everybody is using different matrix for trading, some rely more on very long trends while others are more active. Surely, though, results are less than inspiring.

On the plus side, individual traders shouldn’t see it as a discouragement, but rather a lift. After all, anybody who had positive year outperformed the pros. This must be very comforting thought going forward. While dreams of quick riches might not be realised, it is certainly possible to do better than institutional trading programs, something that is far harder to achieve when trading stocks or futures.

Mike K.