A glance at Twitter, any social media investment club, or investment-themed Reddit will allow you to quickly find a handful of traders who have really stood out over the course of a month, semester, or even year. Believe it or not, the most successful traders choose periods or use different accounts simultaneously to ensure that there is always a winning position to show.
On the other hand, millions of traders blow their wallets and come away empty-handed, especially when using leverage. Take, for example, the Financial Conduct Authority (FCA) in the UK, which requires brokers to disclose the percentage of their accounts in the region that trade non-performing derivatives. According to the data, between 69% and 84% of retail investors lose money.
Similarly, a study by the US Securities and Exchange Commission found that 70% of forex traders lose money every quarter, and eToro, a multinational broker with 27 million users, reported that nearly 80% of retail investors lost money over 12 months.
The same pattern emerges across markets across continents and decades: retail traders rarely maintain profitable operations. Still, novice and seasoned investors alike think they can overcome this bias due to ingenuity or massive influencer marketing campaigns, exchanges, and algorithmic trading systems.
Below are the 4 culprits for the inevitable failure of retail traders. There is no easy fix other than a long-term mindset and a cost-averaging strategy of buying a fixed amount each week or month.
Exchange servers have downtime and there are trading backlogs
In June 2021, the US Financial Industry Regulatory Authority fined Robinhood $70 million, alleging “widespread and significant harm” and “misleading information to millions of its customers” from September 2016 Specifically, the regulator cited platform outages between 2018 and 2018, affecting clients’ ability to execute buy and sell orders during significant periods of market volatility.
On March 8, 2022, the London Metal Exchange (LME), Europe’s largest commodity trading venue, canceled all nickel futures trading and postponed delivery of all physically settled contracts . The reason cited by Bloomberg was “unprofitable short positions, in a massive squeeze involving the largest nickel producer as well as a major Chinese bank.”
Note that this decision is much worse for a broker who deliberately decides to stop his platform. In these cases, at least the customer can choose another intermediary. A pullback, or trade cancellation, is much more problematic because users were already expecting profits, or perhaps even covered, meaning the trade was part of a larger strategy.
High frequency trading and unlimited funding
Professional traders use colocation servers, placing a server as close as possible to an exchange’s data center because this significantly reduces transmission delays. These exchanges offer premium services to high-end clients, including on-site private housing servers.
In addition to requiring a significant amount of volume to cover costs, placement servers give high-frequency traders the advantage of running strategies like ping, which uses a series of smaller orders to span whales who are trying to enter or exit the market.
In addition to being heavily funded, these arbitrage traders usually have additional funding from the exchanges. These advantages basically mean that they can post unsecured trades, similar to holding credits, giving them a huge advantage over retail investors.
The evidence? The insolvency of Three Arrows Capital (3AC) adversely affected the Deribit exchange, which was forced to cover the loss. Additionally, prominent Bitcoin Cash (BCH) figure Roger Ver is being sued by the CoinFLEX exchange for $84 million allegedly owed due to liquidations.
Retail traders need to understand that there is no room for hobbyists and realize the complex relationship between exchanges, venture capitalists, market makers and whales. Whether a partnership is on paper or not, a mutual benefit ensures that these players have preferential access to pre-funding rounds, listings and market access.
The only way for investors to not lose money is to give up trading and avoid leverage trading like the plague. In reality, investors with a period of six months or more have the potential to be profitable in each of their positions.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and business move carries a risk. You should do your own research when making a decision.
