A quick click through Twitter, any social media investment club, or Reddit themed investing will quickly allow anyone to find a handful of traders who have outperformed significantly over the course of a month, a semester, or even a year. Believe it or not, most successful traders choose periods or use different accounts simultaneously to ensure there is a winning position to offer.
On the other hand, millions of traders blow up their portfolios and come out empty-handed, especially when using leverage. Take, for example, the UK’s Financial Conduct Authority (FCA) which requires brokers to disclose the percentage of their accounts in the region where derivatives are traded unprofitably. According to the data, 69% to 84% of retail investors lose money.
Similarly, a study by the US Securities and Exchange Commission found that 70% of foreign exchange traders lose money every three months, and eToro, a multinational broker with 27 million users, reported that nearly 80% of retail investors lost money over the course of 12 months. a month.
The same pattern appears in every market across different continents and decades: retail traders rarely maintain profitable operations. However, both novice and experienced investors believe that they can overcome this bias due to ingenuity or mass marketing campaigns from influencers, exchange systems and algorithmic trading systems.
Here are the four reasons behind the inevitable failure of retail traders. There is no easy solution except for a long-term mindset and a strategy that relies on the average dollar cost of buying a fixed amount every week or month.
Exchange servers are down and there is a decline in trade
In June 2021, the US financial industry regulator fined Robinhood $70 million, alleging “significant and widespread harm” and “misleading information to millions of its customers” starting in September 2016. Specifically, the regulator cited the platform outage between The years 2018 and 2018, affect the ability of clients to execute buy and sell orders during periods of significant market volatility.
On March 8, 2022, the London Metal Exchange (LME), Europe’s largest commodity trading venue, canceled all trading in nickel futures contracts and postponed delivery of all contracts that had already been settled. The reason cited by Bloomberg was “unprofitable selling deals, in huge pressures involving the largest nickel producer as well as a major Chinese bank”.
Note that such a decision is much worse for a broker who decides to deliberately stop their platform. In these cases, the client can at least choose another broker. Pulling back, or canceling a trade, is more problematic because users already expected profits, or perhaps even hedged, meaning that the trade was part of a broader strategy.
High Frequency Trading & Unlimited Funding
Professional traders use co-location servers, bringing the server as close as possible to the exchange’s data center as this significantly reduces transmission delays. These exchanges offer premium services to premium clients, including on-site private housing servers.
Besides the need for a large amount of volume to cover costs, co-location servers give high-frequency traders the advantage of running strategies such as pinging, which uses a series of small orders to determine the range of whales trying to enter or exit the market.
In addition to obtaining significant funding, these arbitrage traders usually receive additional funding from exchanges. These benefits basically mean that they can post trades without collateral, similar to getting credits, which gives them a huge advantage over retail investors.
Guide? The insolvency of Three Arrows Capital (3AC) negatively affected the exchange Deribit, which had to cover the loss themselves. Moreover, prominent Bitcoin Cash (BCH) personality, Roger Ver, has been sued by exchange CoinFLEX for $84 million allegedly owed due to the liquidation.
Retailers need to understand that there is no room for amateurs and realize the complex relationship between exchanges, venture capitalists, market makers and whales. Whether the partnership is on paper or not, the mutual benefit ensures that these players have preferential access to seed funding rounds, listings and market access.
The only way for investors to opt out of losing money is to give up trading and avoid trading leverage like the plague. In fact, investors with a time frame of six months or longer have the opportunity to make profits on each of their positions.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your research when making a decision.