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 most retail investors lose money in the stock market? ›
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 90% of traders lose money? ›
Intraday Trading can help you churn out huge profits, however, one should also remember that it is a highly risky task. It is said that almost 90% of people lose money in intraday trading. Most of the intraday traders lose money because they fail to understand the market movements and end up taking the wrong decisions.
Why do retail traders always lose? ›
Lack of Effective Risk Management
Without a robust risk management strategy, traders expose themselves to the potential of significant losses from a single unfavorable trade.
Why do most 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 of traders lose money? ›
1- No Strategy
The Number #1 reason why traders fail is that they have no strategy. A lot of traders don't want to acknowledge this but the fact is they have no idea what they are doing. Their idea of a strategy is some combination of technical indicators that they have heard or read somewhere.
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 retail traders fail? ›
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.
Do successful traders lose money? ›
As much as 95 per cent of day traders lose money in the market, it demands an investigation. Intraday trading is the most popular, yet data suggests that most intraday traders lose money.
Why do traders lose how traders win? ›
Lack of trading discipline
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. Thirdly, you need to keep booking profits at regular intervals.
Not having and not following a trading plan is a big reason most traders fail. People without a plan are making an assumption that they are smarter than people who do this for a living, and therefore they don't need to prepare, plan, or practice.
Do retail investors lose money? ›
Investing is a zero-sum game where one person's win is another's loss. The majority of retail investors lose money, a fact underscored by risk warnings on nearly every regulated broker's website.
What percentage of retail traders are successful? ›
Approximately 1–20% of day traders actually profit from their endeavors. Exceptionally few day traders ever generate returns that are even close to worthwhile. This means that between 80 and 99 percent of them fail.
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].
Why do many traders fail? ›
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.
How many day traders go broke? ›
Studies have shown that more than 97% of day traders lose money over time, and less than 1% of day traders are actually profitable.
Do most retail investors lose money? ›
It's a shocking statistic — approximately 90% of retail investors lose money in the stock market over the long run. With the rise of commission-free trading apps like Robinhood, more people than ever are trying their hand at stock picking.
What percentage of retail investors lose money in the stock market? ›
90% Retail Investors Lose Money - Rediff.com. Only the top 5 per cent profit makers account for 75 per cent of profits. Saad Bhakshi, an aspiring pilot, is addicted to stock market investing.
How many retail investors lose money in the stock market? ›
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.
What percent of retail traders lose money? ›
However, it can be a frustrating and costly experience for many new traders, leaving them with little to show for their efforts. Based on several brokers' studies, as many as 90% of traders are estimated to lose money in the markets.
