“90% of traders lose 90% of their capital in 90 days” – old broker saying
Being a Retail Trader is not easy – the term has attracted quite a negative connotation over the years. The main reason for this comes from the statistics of large brokerages which consistently show a minority of clients being profitable.
Retail Traders have trouble staying afloat. The question is: why?
Does this mean Retail Trading is a losing proposition altogether? Just because we’re retail traders, does that mean that we’re destined to lose 90% of our capital in 90 days? No.
Retail Trader: what does it mean?
The destiny of a trader does not lie in his name. The destiny of a trader lies in his education, resilience and common sense. But more on that later. Being a retail trader simply means:
• You trade your own account → in other words, you are prop-trading. You are exposing your capital to the market’s oscillations, in an attempt to insert yourself into a directional bet that has a higher probability of success. So long as you don’t follow “tips”, this is not a disadvantage. What is a slight disadvantage is the fact that trading your own capital is emotionally destabilizing and requires some grit to overcome.
• Your account size is not that large → most people don’t have the large pockets that Commodity Trading Advisors or hedge funds have. Being small is actually a benefit because you can dip in & out of the market following larger traders’ footprints, exposing yourself to the market’s oscillations only when conditions dictate so. It’s additional flexibility.
• You may do it full time or part time → you need some sort of income, that can then allow you to save up. Only if you have savings, can you allocate a part of the savings to risk capital (trading capital).
Understanding the Negative Connotation
There has always been a certain divide between those that work on Wall Street (insiders) and those that work on Main Street (outsiders). It goes as far back as can be remembered. Jesse Livermore was writing about Main Street vs. Wall Street in his famous biography “Reminiscences of a Stock Operator”, and even in the 1980s and 1990s best sellers were written using the same theme, like “Beat The Street” by Peter Lynch.
It would seem that only “insiders” have an edge in this game. And FX broker statistics seem to support this idea, highlighting the consistent underperformance of their clients, by creating “retail sentiment indicators”. The message is clear: look at what the “dumb money” is doing, and try to do the opposite. This is far from the truth.
Nowadays, retail traders have access to tight spreads & excellent execution; there are professional analysis packages like Metastock Xenith (a Retail version of Reuters Eikon) available for an affordable fee; there are squawk services…basically the common trader nowadays has “institutional-level” instruments at his disposal and can no longer be considered an outsider. And there is a load of quality education on the internet.
So why do Retail Traders continue to struggle, and attract such negative vibes?
• Lack of Discipline → losses must be managed well. Not taken for granted, just accepted. And it takes a great amount of personal courage to act in the face of uncertainty.
• Inadequate Capitalization → FX brokers have been allowing traders to open accounts with as little as USD 50 – which can be a benefit – but with very low margins, and high leverage, it’s very easy to treat FX Trading more like a gamble than a serious endeavour.
Source: Proprietary Illustration
- Adherence to Technical Analysis → indicators are spoken about all the time, but they produce random results if applied anywhere & everywhere, as does price action analysis on a single time frame.
- Focus on smaller time frames → it’s a sad truth that the clearer indications come from the higher time frames. Looking at the market through a microscope will lead to inevitable loss.
- Poor use of stop losses → they should either be wide (to help ensure a win) or tight (to help ensure a profit) but they always need to be based on forward profit potential (Risk:Reward ratio).
- Ignoring the fact that professional traders have a salary regardless of their performance (up to a certain point). Stated otherwise: they do not need to generate income from their trading. They are compensated for trading other people’s capital. The psychological issues they face are somewhat easier to overcome relative to someone who is risking his own capital. The common retail trader is more like the hedge fund owner during the startup phase where his own money is at stake.
- Depleting Capital: professional traders seek to grow the amount under management. They can increase their risk exposure when they have a winning streak and they reduce their exposure when they lose. This is a fundamental necessity for capital preservation. Compare that to the retail trader that wants to pull money out of his account every month as a normal paycheck. The fact that the retail trader typically looks at short time frames, pulls money out of the account when winning but adds capital or becomes risk-seeking when losing (because he needs to pay the bills so he keeps on trading) and has larger spreads than professionals is usually a recipe for capital destruction!
How to be a savy Retail Trader
Know this: you can be as good or even better than some professionals. Do not think that most professionals have the upper hand. They do not. So how can you put yourself into a position to stand a fighting chance?
- Seek to survive initially, and learn. Trade on a demo while learning. Nowadays demos replicate real market conditions. Until you can demonstrate consistency on a demo for at least 3 months, it’s no use throwing real money at the market.
- Seek guidance from experienced traders. There are many of them around, whether on social media, forums or websites. Having a mentor or at least some guidance can push you quickly up the learning curve.
- Specialize: try to do one thing well and not be a jack of all trades.
- Build a robust trading strategy: the method should be simple & subtle, the method should be robust (i.e. applicable to all markets with minor adjustments), the method should be based around structural qualities of markets (so a good understanding of market microstructure is generally a plus).
- You should trade small compared to the size of your trading account. Consistency and longevity are the right traits to have.
Over to you
The path to consistency is challenging and will require dedication and perseverance. Above all, it will require a clear and objective mind, and the capacity to always simplify to the essence what you’re trying to accomplish. Do you have what it takes?
About the Author
Justin Paolini is a Forex trader and member of the team at www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.