A quick flick through Twitter, any social media investing club, or investing-themed Reddit will quickly allow one to find handfuls of traders who have vastly excelled throughout a month, semester, or even a year. Believe it or not, most successful traders cherry-pick periods or use different accounts simultaneously to ensure there’s always a winning position to display.
On the other hand, millions of traders blow up their portfolios and turn out empty-handed, especially when using leverage. Take, for example, the United Kingdom’s Financial Conduct Authority (FCA) which requires that brokers disclose the percentage of their accounts in the region that are unprofitably trading derivatives. According to the data, 69% to 84% of retail investors lose money.
Similarly, a study by the U.S. Securities and Exchange Commission found that 70% of foreign exchange 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 in every market across different continents and decades: retail traders seldom sustain profitable operations. Still, novice and experienced investors think they can overcome that bias due to ingenuity or mass marketing campaigns from influencers, exchanges and algorithmic trading systems.
Below are the 4 culprits behind the inevitable failure of retail traders. There is no easy solution aside from a long-term mentality and dollar-cost average-based strategy of buying a fixed amount every week or month.
Exchange servers have downtime and there are trade rollbacks
In June 2021, the U.S. Financial Industry Regulatory Authority fined Robinhood $70 million, alleging “widespread and significant harm” and “misleading information to millions of its customers” starting in September 2016. Specifically, the regulator cited the platform’s outages between 2018 and 2018, affecting clients’ ability to execute buy and sell orders during significant market volatility periods.
On 8 March 2022, London Metal Exchange (LME), the largest commodities trading venue in Europe, canceled all the trades in nickel futures and deferred the delivery of all physically settled contracts. The reason cited by Bloomberg was “unprofitable short positions, in a massive squeeze that has embroiled the largest nickel producer as well as a major Chinese bank.”
Notice that such a decision is vastly worse for a broker that decides to deliberately…
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