A quick look on Twitter, any social media investment club or Reddit on the subject of investing will quickly find a handful of traders who have largely excelled throughout a month, a semester or even a year. Believe it or not, most successful traders select timeframes or use different accounts simultaneously to ensure there is always a winning position to show.
On the other hand, millions of traders blow up their wallets and end up empty-handed, especially when using leverage. Take, for example, the UK’s Financial Conduct Authority (FCA) requiring brokers to disclose the percentage of their accounts in the region that trade derivatives unprofitably. According to the data, 69% to 84% of retail investors lose money.
Similarly, a study by the United States 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 almost 80% of retail investors lost money over 12 months.
The same pattern emerges in all markets across different continents and decades: retail traders rarely maintain profitable operations. Yet both novice and experienced investors believe they can overcome this bias through the ingenuity or mass marketing campaigns of influencers, exchanges, and algorithmic trading systems.
Below are the 4 culprits behind the inevitable failure of retail traders. There is no easy solution outside of a long-term mindset and an average cost strategy of buying a fixed amount each week or month.
Exchange servers have downtime and there are business 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” from September 2016 Specifically, the regulator cited platform outages between 2018 and 2018 affecting clients’ ability 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 platform, canceled all nickel futures trading and postponed delivery of all physically settled contracts. The reason cited by Bloomberg was “unprofitable short positions, in massive pressure that dragged down 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 shut down his platform deliberately. In these cases, at least the client can choose another intermediary. A rollback, or trade rollback, is much more problematic because users were already expecting profits, or maybe even hedging, 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 to an exchange’s data center as possible, as this greatly reduces transmission times. These exchanges offer premium services to high-end customers, including on-site private housing servers.
In addition to requiring a large volume to cover costs, colocation servers offer high-frequency traders the advantage of executing strategies such as ping, which uses a series of smaller commands to target whales trying to enter or exit the market.
In addition to being heavily funded, these arbitrage traders usually have additional funding from exchanges. These advantages basically mean that they can post trades unsecured, as if they have credits, which gives them a huge advantage over retail investors.
The proof? The insolvency of Three Arrows Capital (3AC) had a negative impact on the Deribit exchange, which was forced to cover the loss itself. 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 amateurs and realize the complex relationship between exchanges, venture capitalists, market makers and whales. Whether or not it is a partnership on paper, a mutual benefit guarantees these players preferential access to pre-seed rounds, quotes and market access.
The only way for investors not to lose money is to give up trading and avoid leveraged trading like the plague. In reality, investors with a timeframe of six months or more have a chance of being profitable in every position they hold.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.