Why Do Retail Traders Lose?

(It's usually our own fault!!)

If you’re a member of eToro, Robinhood or any other form of social based platform you will see the continuous posts about ‘the broker taking out my stop’ or ‘funds pushing the markets down to take out the retail traders. If we believe as retail traders we are at a disadvantage how do we overcome this? It’s quite simple, DON’T TRADE LIKE RETAIL! Was does this mean? Well, if you sign up to any CFD or spread bet provider you will see disclaimer s such as ’75% of traders lose money on this platform’. That’s a lot! But why does it happen? Why do retail traders mostly lose? There are a number of factors which I’ll cover below. 1) Selling tops and buying bottoms. Retail traders tend to do the opposite of the market. You’ve probably heard the term ‘The trend is your friend’. Well, believe it or not retail traders inherently try to pick tops and bottoms of markets as ‘it’s gone too high, or its gone too low’. They try to time the swings and mostly always get it wrong. IG Markets believe in this theory so strongly they actually created a sentiment index on Daily FX to show they are doing the opposite to the retail traders! 2) Leverage!! Leverage is a way of brokers giving you the rope to hang yourself. As retail traders we look at it as a way to build our accounts faster and make more money. If the prior is true then surely it works both ways? We can also lose money just as quick. When you apply leverage you trade on margin which means you need a certain amount of equity in your account incase the position moves against you or alternatively some brokers like eToro require a stop loss in place. Now if you apply a x2 leverage it’s not so bad, you can use a wide stop. With high leverage you need a tight stop and this is where the danger comes in. As I mentioned above, traders pick tops and bottoms in markets, so when they are wrong (most of the time) these stops get taken out as the market moves against them. 3) Listening to others. Now this may seem like a contradictory point when I want people to Follow My Trades but the reality is no one knows what way the market will go in the next hour let alone the next month. If you were to believe what you read on twitter or trading groups you’d think we were entering another great depression every time the market drops 1%. Most people talk nonsense, unless they back up claims with statistical or historical data ignore it. Even then we are just using previous data to help make a call on the future, no system or theory is 100% correct. 4) Going all in. People get hyped on one stock, I see it all the time. Tesla, Nio, Hertz (when they went bankrupt, wtf?!) And even the IPO of SnowFlake Inc. People throw all their equity into one stock. Yes, you may get lucky but most likely you will lose money especially when you combine it with leverage! 5) Having no patience. Trading is not a get rich quick scheme, in fact you’re more likely to go broke chasing money. So if you’re in it to be a millionaire this time next year you better start sending your CV off! Warren Buffet once said "The stock market is a device for transferring money from the impatient to the patient”. 6) Recently there has been news that some brokers (robinhood) have been selling order data to HFT firms (High frequency trading). Now as far as I’m concerned this is wrong, these HFTs can now see where the majority of stops are and actually ‘hunt’ them. So as a retail trader you really are on the back foot. (Read it for yourself, it's true!)

This list isn’t exhaustive by any means but it covers some of the main points as to why people lose money. So below are my tips on how NOT to lose money: 1) Don’t use leverage and actually buy the underlying asset. Yes, it will take longer to grow your account, but it’s better than losing it all. If you’re not using leverage you don’t need to use a stop loss or if you do you can put it where ever you want but my advice is to anticipate swings and keep them as wide as possible. My average stop (if I use them) is around 30% below my entry. If markets move that much against me my analysis is wrong, there is a fundamental issue with the company or the markets are crashing due to a bigger more powerful outside influence. 2) Invest in high quality companies. With the introduction of fractional shares through companies like Trading212 and eToro anyone can buy a piece of Apple, Microsoft, Amazon etc. Why put money into bankrupt companies like Hertz when you can actually buy companies that make money? Invest in companies that dominate markets and have a high barrier to entry. Investing can detach us from the realities of the company. Always look at it as if you are owning a piece of that empire. Your money is helping build it and you want your money to grow!

3) Diversify. Spread your money around, even the greatest of empires can crumble and fall so you don’t want all your eggs in one basket. Let’s use eggs as an example. You’ve got one giant egg in the basket, that has to feed your whole family for the day and you drop it on the floor, what happens? No food for your family. If you have 20 eggs and drop one what happens? Everyone is still eating. 4) Be patient. I won’t dwell on this point but if you google compound interest calculator and have a play around you can see how much money you can make over the next 10, 20 or 30 years. You’ll be amazed how money makes more money over time. Again this list isn’t exhaustive but may help some of you understand why you are losing trades. Take time to invest in high quality companies, read books, learn to read balance sheets and protect your money. It’s YOUR money, don’t waste it gambling. Good luck on your trading journey! You can invest with as little as £1 with Trading212 or follow me on eToro and let me do the trading for you! Read part 2 here


Recent Posts

See All