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:
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- 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 over 90% of options traders lose money? ›
Poor risk management: Traders who do not properly manage their risk are more likely to suffer large losses. This is because they may not use stop losses or they may not take profits when they are available. Overtrading: Traders who overtrade are more likely to make mistakes.
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 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 forex traders lose money? ›
The reason many forex traders fail is that they are undercapitalized in relation to the size of the trades they make. It is either greed or the prospect of controlling vast amounts of money with only a small amount of capital that coerces forex traders to take on such huge and fragile financial risk.
What is the 90% rule in trading? ›
It is a high-stakes game where many are lured by the promise of quick riches but ultimately face harsh realities. One of the harsh realities of trading is the “Rule of 90,” which suggests that 90% of new traders lose 90% of their starting capital within 90 days of their first trade.
Why do most options traders lose money? ›
In search of these, the Traders would often Buy Higher Calls and Lower Strike Puts simply because they are cheap. If the stock does move in a day by a big margin, they would make money as well but if they do not or they do over 10 days, there may not be any money or even a loss.
Why do 95% of day traders lose money? ›
The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.
Why do 80% of day traders lose money? ›
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.
Why do 95% traders fail? ›
Insufficient Education and Knowledge: Many traders plunge into the market without a solid grasp of its nuances. This lack of understanding leads to impulsive decision-making and substantial financial losses.
Fear of missing out (FOMO), fear of losing, a lack of patience, and greed are common causes of rash decisions and costly blunders. Ineffective Risk Management: Failure to manage risk properly, such as putting too much money at risk in a single trade, is a common cause of failure.
Why do traders lose money in stock market? ›
One of the primary reasons why traders lose money is because they fail to manage their risk effectively. It's crucial to set stop-loss orders and appropriately size positions to control your losses when trading stocks. Without proper risk management, even a single bad trade can wipe out a good chunk of your profits.
Who keeps the money you lose in the stock market? ›
No one, including the company that issued the stock, pockets the money from your declining stock price. The money reflected by changes in stock prices isn't tallied and given to some investor. The changes in price are simply an independent by-product of supply and demand and corresponding investor transactions.
Do 90% of traders fail? ›
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.
Do most day traders lose money? ›
The vast majority of day traders lose money, reflecting the activity's risk. The factors that determine the potential upside of day trading include starting capital amount, strategies used, the markets in which you are active, and luck.
Do day traders 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.
What percentage of options traders lose money? ›
His agency, the Securities and Exchange Board of India, known as Sebi, says 90% of active retail traders lose money trading options and other derivative contracts. In the year ended March 2022, the latest for which figures are available, investors lost $5.4 billion.
Can you lose more than 100% trading options? ›
Like other securities including stocks, bonds and mutual funds, options carry no guarantees. Be aware that it's possible to lose the entire principal invested, and sometimes more. As an options holder, you risk the entire amount of the premium you pay.
Why do most people fail at options trading? ›
Most people fail at options trading because they have not taken the time to learn how options work and how volatility affects options pricing.
What percent of options traders fail? ›
options trading: Bleeding red! 5 reasons why every 9 out of 10 F&O traders lose money - The Economic Times.
