One can quickly find traders who have excelled over a period of time, whether it’s a month, semester, or a whole year by simply looking through Twitter or any investing-themed Reddit. Most successful traders choose to use multiple accounts or cherry-pick periods to make sure there is always a winning position.
However, many traders end up empty handed, especially when they use leverage. For example, the Financial Conduct Authority (UK) requires brokers to disclose how many accounts they have in the region where they are not profitably trading derivatives. The data shows that 69%-84% of retail investors lose their money.
A study by the United States Securities and Exchange Commission also found that 70% foreign exchange traders lose money each quarter. Similarly, eToro, a multi-national broker with 27,000,000 users, reported nearly 80% of retail investors had lost money in 12 months.
This same pattern is evident in all markets across continents and decades. Retail traders rarely sustain profitable operations. Despite this bias, both novice and experienced investors believe they can overcome it through ingenuity and mass marketing campaigns by influencers, markets, and algorithmic trading system.
Here are four reasons retail traders will fail. There is no simple solution to the problem except for a long-term mindset and average-cost-based strategy that involves buying a fixed amount each week or month.
There are trade rollbacks and downtime on Exchange servers
The U.S. Financial Industry Regulatory Authority imposed a $70 million fine on Robinhood in June 2021. It alleged that Robinhood had caused “widespread, significant harm” and provided misleading information to millions of customers since September 2016. The regulator specifically cited the platform’s outages in 2018 and 2018, which affected clients’ ability to execute sell and buy orders during periods of high market volatility.
The largest European commodities trading platform, London Metal Exchange (LME), cancelled all trades in nickel futures on March 8th, 2022 and delayed the delivery of all physical settled contracts. Bloomberg cited the reason was “unprofitable short position”, in a huge squeeze that has engulfed both the largest nickel producer and a major Chinese bank.
This is a far worse decision than a broker who decides to stop their platform. The client has the option to choose another intermediary in these cases. Rollbacks, also known as trade cancellations, are more troublesome because clients had expected the profits, or perhaps even hedged, so the trade was part a larger strategy.
High-frequency trading, unlimited funding
Colocation servers are used by professional traders to reduce transmission delays. These exchanges offer premium services for high-end clients.
Colocation servers require a large volume of volume to cover costs. High-frequency traders also have the advantage of colocation servers allowing them to run strategies like pinging which uses smaller orders to scope whales looking to enter or leave the market.
Arbitrage traders are often heavily funded and also receive additional funding from the exchanges. They can trade without collateral, which is similar to having credit, giving them a significant advantage over retail investors.
What evidence? The evidence? CoinFLEX is also suing Roger Ver, a prominent Bitcoin Cash ( CH) person, for $84 million allegedly due to liquidations.
Retail traders must understand that there is no place for amateurs and appreciate the complex relationship between whales, market makers, venture capitalists, and exchanges. No matter how formal the partnership may be, mutual benefit will ensure that both parties have access to pre-seed funding rounds and listings, as well as market access.
Investors can’t afford to lose money if they stop trading and abstain from leverage trading. In reality, traders who hold positions for six months or more have a better chance of making a profit.
These views and opinions are the author’s and do not necessarily reflect those of Cointelegraph. Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.