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Retail investors' trading behaviour in foreign exchange markets

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Based on a dataset of positioning data from one of the largest forex trading platforms in the world, we study the trading behaviour of retail investors on a daily frequency for 14 currency pairs. We examine, whether retail investors could benefit from positioning data. Using a quantile regression framework we find that a representative investor shows a combination of short term contrarian behaviour and long term trend following. Employing positioning data in a naive trading strategy, we observe strong signs of the disposition effect. Overall, investors approach to market timing paired with an asymmetry in realizing gains and losses leads to systematic underperformance based on a strategy mimicking the trading behaviour of investors average positioning.
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