Retail traders are individuals who trade stocks, currencies, commodities, or other financial instruments for their accounts rather than for an institution or a professional firm. Retail trading has become more and more widespread in recent years, thanks to the availability of online platforms (such as Robinhood), low-cost brokers, social trading platforms, and, of course, social media. However, retail trading is also hazardous and challenging, and most retail traders end up losing money. According to various studies and reports, between 70% to 90% of retail traders lose money every quarter. This article will discuss the main reasons retail traders lose money and how they can enhance their performance and profitability.
Firstly, it has been observed that retail traders often need help in making a profit due to the absence of a well-defined and consistent trading plan. A trading plan essentially outlines the rules and principles that steer the trader’s decisions regarding which assets to trade, when to do so, what amount to invest, and how to manage risks and exit positions. A trading plan helps the trader to avoid emotional and impulsive trading, which can lead to overtrading, chasing losses, or holding onto losing positions too long. A trading plan also helps the trader identify and exploit market opportunities based on their analysis, strategy, and edge. Without a trading plan, retail traders are more likely to trade randomly, inconsistently, and irrationally.
Another reason why retail traders lose money is that they do not have an asymmetrical risk-reward ratio. This means they risk more than they stand to gain on each trade, or their potential losses are more significant than their potential profits. An asymmetrical risk-reward ratio allows the trader to be profitable even if they are wrong more often than they are right. For this purpose, the investors should check the Sharpe or Sortino ratios. Those ratios represent the potential earnings in relation to the standard deviation of the stocks. An additional tip would be „checking out for the maximum drawdown“; as an example, ourAP Long-Short strategyhas a maximum drawdown of -17.10%, suggesting a rather safe investment opportunity compared to, let’s say, S&P500, which has -47.51%.
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How can retail traders be more successful?
While there are no guarantees when it comes to making money through trading, retail traders can improve their chances of success by following the proper steps. Though it may not be an easy process, with the right strategy, achieving success is certainly possible. First, they need to develop and follow a trading plan that suits their personality, goals, style, and edge. A trading plan should include the following elements:
- A market analysis (fundamental, technical, or quantitative)
- A trading strategy (entry and exit signals)
- A risk management system (limits, stop-losses, take-profits, etc.)
- A proper performance evaluation
Second, they need to adopt an asymmetrical risk-reward ratio that allows them to be profitable even if they have a low win rate. Third, they need to be disciplined and patient in executing their trading plan. Fourth, they should not let their emotions or external influences affect their decisions. Fifth, they should also avoid overtrading or undertrading. Finally, they need to learn from their mistakes and successes, and they should constantly seek to improve their skills and knowledge.
And as an alternative, there is always an option to ask for financial advice or invest in pre-existing actively managed funds.
In conclusion, retail trading is challenging and risky, requiring much preparation, discipline, and skill. Most retail traders lose money because they do not have a clear and consistent trading plan and a proper risk-reward ratio. To be more successful, retail traders need to develop and follow a trading plan that matches their edge and style, adopt an asymmetrical risk-reward ratio that allows them to be profitable even with a low win rate, be disciplined and patient in executing their trading plan, and learn from their experience and feedback.
FAQs
In conclusion, retail trading is challenging and risky, requiring much preparation, discipline, and skill. Most retail traders lose money because they do not have a clear and consistent trading plan and a proper risk-reward ratio.
Why do 90% of people lose money in the stock market? ›
Staggering data reveals 90% of retail investors underperform the broader market. Lack of patience and undisciplined trading behaviors cause most losses. Insufficient market knowledge and overconfidence lead to costly mistakes. Tips from famous investors on how to achieve long-term success.
Why do 90% of day traders fail? ›
They're not in the game for the long run; they want a quick buck. But here's the kicker: the market doesn't care about your impatience. By failing to wait for the right opportunities, you're setting yourself up for failure. Remember, trading is not a sprint; it's a marathon.
Why do so many retail traders lose money? ›
Lack of Effective Risk Management
In-Depth Insight: Inadequate risk management is a critical factor in retail trader losses. It involves setting stop-loss orders, determining position sizes, and managing overall portfolio risk.
Why do 95 of traders lose money? ›
Lack Of Discipline
However, many new traders enter the market with a casual mindset, often influenced by the stories of quick riches. This lack of discipline leads to impulsive decisions and poor trading plans that fail to analyse the market thoroughly.
Why do traders lose money in trading? ›
Lack of trading discipline
This is the primary reason for intraday trading losses in the intraday trading app. Trading discipline has to focus on three things. Firstly, there must be a trading book to guide your daily trading. Secondly, you must always trade with a stop loss only.
Why do retail traders fail? ›
The truth is, most traders lose money for one simple reason: They don't have a plan. These losses can be substantial: The bull run during the pandemic saw retail traders lose more than $1 billion, according to a recent study.
Are retail traders losing billions? ›
In India retail investors make up 35% of options trades. In India retail investors make up 35% of options trades.
What is the number one reason why traders fail? ›
Lack of Knowledge and Preparation: Many traders enter the market without sufficient understanding of market dynamics and trading strategies. This lack of knowledge can lead to poor decision-making and significant losses.
Why are so few day traders successful? ›
If you don't have much capital, and don't have a lot of time to commit, the odds of making a living from day trading are remote. It is possible, but it is going to take a lot of time and discipline to build a small account into something that can produce a living.
Another reason why day traders tend to lose money is that it's very different from long-term investing. While traders take advantage of price swings (which means they have to make specific predictions), investors tend to buy a diversified basket of assets for the long haul.
How much money do day traders with $10,000 accounts make per day on average? ›
With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].
Do retail traders actually make money? ›
Most traders are not profitable. Can Retail Traders Actually Make Money? Retail traders can make money if they discipline themselves to learn a specific trading style and use risk management techniques. It isn't easy to make money consistently as a trader, but it's possible.
Who is the best trader in the world? ›
1. George Soros. George Soros, often referred to as the «Man Who Broke the Bank of England», is an iconic figure in the world of forex trading. His net worth, estimated at around $8 billion, reflects not only his financial success but also his enduring influence on global markets.
Is it true that 95 percent of traders lose? ›
Entering the exhilarating world of financial markets is a pursuit laden with potential, but an unsettling truth shadows the journey – a staggering 95% of traders end up facing failure. In this exploration, we dissect the intricacies of this phenomenon, translating the complexities into clear, concise insights.
Do day traders actually make money? ›
The same study found that the majority of trades, up to 80%, are unprofitable. While some day traders end up successful and make a lot of money, they are the exception rather than the norm. If you want to try day trading, start small and do not commit your entire investment account.
Why most of the people fail in stock market? ›
Lack of Knowledge: Many people jump into the stock market without understanding the basics of how it works. They do not have a clear understanding of the terminology, the risks involved, and the market dynamics. This lack of knowledge can lead to poor decision-making and ultimately losses.
Why did people lose money when the stock market crashed? ›
The stock market crash crippled the American economy because not only had individual investors put their money into stocks, so did businesses. When the stock market crashed, businesses lost their money. Consumers also lost their money because many banks had invested their money without their permission or knowledge.
Where does the money go that people lose in the stock market? ›
Key Takeaways. When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Drops in account value reflect dwindling investor interest and a change in investor perception of the stock.
