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Attachments: Why are most retail traders usually on the wrong side of the market?
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Why are most retail traders usually on the wrong side of the market?

  • Post #1
  • Quote
  • First Post: Edited Jul 25, 2010 1:35pm Jul 18, 2010 10:05am | Edited Jul 25, 2010 1:35pm
One question that's often asked a lot is why do 95% of traders (or whatever the statistic is) lose? The answers usually range from anything to bad money management to cutting winners and letting losers run.

One thing I don't hear about is that most retail forex traders are on the wrong side of the market. If you look at the forex sentiment indexes published by the likes of OandA and dailyfx.com which publishes it's 'SSI' it appears that most retail for traders are almost always on the wrong side of the larger trend. Why is this? What are your ideas?

EDITED -

Thanks to everyone for all their comments, it's helped me reach some conclusions that I've put on my blog http://www.myforexdot.org.uk/whyretailforexiswrong.html although I'm always learning. It's good to get such a lot of feedback and ideas from so many traders, especially the experienced ones who're kind enough to share their knowledge with newbies. Thanks again.
Maybe they do not pay enough attention to the "Longer Trend".

Possibly they spend too much time on short term charts when they have not actually learned how to trade at all.

just a side note.. 95% of "traders"...
having a forex account does not make one a trader.... 95% of those "Attempting" to trade fx fail, I can go with that maybe..
Most of those Attempting it will never be traders and out of that small minority that will become traders many (myself included) are probably years away from that goal.

jmo.
Thanks for your reply.

However, I don't think it can be the full picture. I mean, if retail forex traders simply just ignored the longer term trend then I would expect to see 50/50 and the losses coming through other things like bad risk management and doubling up a bad trade and cutting of winner of quickly for a small profit.

But no, it appears that retail traders are usually on the wrong side of the market except at turning points http://www.dailyfx.com/forex/educati...e_the_SSI.html
Retail traders are in most cases uninformed. They usually have little to no knowledge of trading, or even the markets in which they trade. Most of the time they use only old prices (charts) to make trading decisions. They are under-capitalized and completely underestimate the time and cost involved in becoming a professional trader.

The one benefit they provide to financial markets is that they become liquidity for informed traders. The money that the uninformed lose to the informed actually ends up paying for the research operations run by successful value traders. Value traders benefit the entire economy because they're trading makes prices more informative and helps industries of all sorts efficiently allocate resources.

Without uninformed scapegoat traders, profitable trading would not be possible.
Hi,

1. Greed.
2. using bad leverage so they are blown out too quickly
3. Brokers help them
4. Many traders enter too early in trend opposite direction trying to catch a greedy reversal. While trend will be fueled more by them.
5. many retail trader didn't even took time to learn TA & are relying on some strategy while not understanding price action & timing.

Also not too true some time the crow is right. Check SSI indicator from FXCM or open position on Oanda & you will see some time it works both way.

Regards
13
Brokers are angels
Quoting Scotty B
Without uninformed scapegoat traders, profitable trading would not be possible.
So, during an uptrend the market will have to fall, stall or do whatever else it takes to trick the minority into going short before the market movers can come in, take the otherside of these traders and make the trend continue?
Quoting fx13
Also not too true some time the crow is right. Check SSI indicator from FXCM or open position on Oanda & you will see some time it works both way.
Thanks. As a GENERAL rule though, the crowed is (usually) wrong, it's only at turning points when both the big players who actually move the markets AND the crowed are playing the same direction that the crowed is right. Then the crowed usually seem to take a small profit, the trend changes direction and they go back to being wrong again.

They say when everyone is long the market must fall as there is nobody left to buy, and when everyone is short the market must rise as there is nobody left to see. These are the turning points, I believe the crowed is only generally right and these turning points, and these points are fairly infrequent and don't tend to last very long.
They're not always on the wrong side of the market at all. The majority just dont know if they are wrong or right and are therefore unable to exploit opportunities as they arise.
Quoting Davidee
So, during an uptrend the market will have to fall, stall or do whatever else it takes to trick the minority into going short before the market movers can come in, take the otherside of these traders and make the trend continue?
There is much more to it than that. There are many classes or types of uninformed traders that supply liquidity to successful speculators.

Here is the scoop in a nutshell:

Trading is all about the interplay between intrinsic value and market value (price). If the price of an instrument drifts away from the current value estimates of those who control the markets with their enormous bank rolls, they will trade and push price back to that area. Anyone caught in the middle is in danger. Sometimes values will change and price won't. This would be the case during a significant news event. When new information hits the market, values change and therefore price adjusts to reflect the new information.

The funny thing is that for little traders, it is pretty much impossible to gain access to the information that large traders use. This is true for many reasons, one of the biggest being that quality research/data is very expensive to acquire or produce.

Retail trading is somewhat of a misnomer anyways. If someone really has the skills to legitimately be called a trader (they are successful[knowledge + experience]), they will see the disadvantages of the retail sector and avoid it. They most likely trade for an institution or trade within the real market privately, i.e. have the ability to actually offer/take liquidity from the market they trade in.

So to sum this up and to answer the question of your thread, retail traders are doomed by definition. They might get lucky sometimes, but you cannot quit your job and base a career on luck and silly price charts.
Quoting Razzle
They're not always on the wrong side of the market at all. The majority just dont know if they are wrong or right and are therefore unable to exploit opportunities as they arise.
You sum it up very concisely, I like it.

To be right means to know what the big money is thinking/doing/looking at. To be wrong means you're uninformed. To be lucky is neither.
  • Post #11
  • Quote
  • Edited at 1:46pm Jul 18, 2010 12:01pm | Edited at 1:46pm
They are on the wrong side because they don't know how to trade. They are buying into the bullshit, and falling for all the traps... They are lacking some serious information, and all the wrong things are shoved in their faces. Most of the time, in the beginning, it seems everyone is trying to find out which indicators are the best to use, and learning TA. First thing they should learn is structure, how it works, importance of management, as Scotty B said, realizing what the real setups are... understanding what big money is looking to do, or how dealers are working is the first step I would suggest to someone who is constantly finding themselves on the wrong side. You need to anticipate and not be late. By using these colorful lagging devices and TA the wrong way for confirmation... you are already LATE.
Quoting Scotty B
There is much more to it than that. There are many classes or types of uninformed traders that supply liquidity to successful speculators.


So to sum this up and to answer the question of your thread, retail traders are doomed by definition. They might get lucky sometimes, but you cannot quit your job and base a career on luck and silly price charts.
http://www.forexfactory.com/showthread.php?t=86429
http://www.forexfactory.com/showthread.php?t=226917
http://www.forexfactory.com/showthread.php?t=155393
http://www.forexfactory.com/showthread.php?t=229238
http://www.forexfactory.com/showthread.php?t=163012
http://www.forexfactory.com/showthread.php?t=80290
http://www.forexfactory.com/showthread.php?t=222869
http://www.forexfactory.com/showthread.php?t=221375


A small sample, but enough ... of people making it in this retail business I might add!



P.S. Sorry, can't mention or remember everybody, just some of my favourites.
Most people are total failures and I appreciate their participation EVERY DAY. To become good at anything requires years and years and years of practise.

I am teaching four kids age ten to 13 how to trade. Its fun for them, and replaces all that dead time they spend on video games.

By the time they are old enough to have their own account, they might be able to say g'bye to regular life, and regular folks.
Anyone who has ever been successful at any endeavor has done so by accumulating knowledge and experiences from a multitude of sources in their life up to that point.

There is no one reason why some fail while others succeed.

But one of these reasons is retail wannabe traders wind up on the wrong side of the markets because of their need for confirmation. So they wait and wait and wait and then enter once it is too late. Lose. Then they impulsively jump right in. And lose again. And then they .............. "rinse, repeat" until they bust out.
Quoting Davidee
One question that's often asked a lot is why do 95% of traders (or whatever the statistic is) lose?...
I take it you've been in the EURUSD thread. LOL You can learn all you need to know about trading in general by visiting a few threads on FF.

The average retail trader is inexperienced and have not grasp on how the market works. Theres a reason FF harbors more inexperienced traders than any other website in the world. There are truly dedicated noobies who are looking to learn as much as possible about the market by following and asking legitimate questions. The problem is most of those dedicated to learning are asking the wrong traders on FF these questions as a good majority of experienced FF users are not as experienced as you may think. The other group who visit FF are not looking learn but to be lead. Its a known fact most new traders sign up with FF not to discuss the market or contribute to the forum but to obtain free trading signals. Amazes me how EURUSD thread will have 400 visitors but 20 or so are the only ones actively participating. If the remainder has a FF account you'll quickly see their post count in the low numbers (such as 0-25 posts). This to me shows the problem with retail trading as the majority is looking for a free ride. It's the lazies that give retail trading a bad name as most are blowing account after account because he/she is following another noobie trader that hasn't a clue on how the market works. All it take is for on trader to get 2 out of 3 trades right for the masses to follow but no one ever does the research to find that trader's average win/loss ratio in a year.

Another thing I've noticed about FF threads, a lot of new/inexperience traders making long term trading decisions off 5 min chart. I've been brought up in the trading world to not trading anything under the Daily time frame unless I hold a minimum of 5 profitable years under my belt. If I see one more inexperienced trader post a 5min or 15min chart riddled with indicators asking why he/she is not profitable, I quit. Even the most experienced traders don't touch anything under an Hourly. Traders calling tops/bottoms based on oscillators .... need I say more.

There are many factors as to why rookie traders fails but the most important is their own self determination. I don't know not one professional trader that didn't sacrifice and struggle to learn their craft, including your truly. We fought to get ours and make a name and small profit for ourselves. I sat in the trenches and took on grenades alone. Todays noobie traders has no fight, no determination and feels we experienced profitable traders owes them something. None of them takes the time to learn and perfect their trading craft but expend quite a lot of energy and time looking for the free easy way to riches.

Kelso sums it up.
Inserted Video
Quoting SunTrader
Anyone who has ever been successful at any endeavor has done so by accumulating knowledge and experiences from a multitude of sources in their life up to that point.

There is no one reason why some fail while others succeed.

But one of these reasons retail wannabe traders wind up on the wrong side of the markets is their need for confirmation. So they wait and wait and wait and then enter once it is too late. Lose. Then they impulsively jump right in. And lose again. And then they .............. "rinse, repeat" until they bust out....
Good grief, a ray of Sunshine! So it's not all DOOM AND GLOOM

Quoting Jhig
I take it you've been in the EURUSD thread. LOL You can learn all you need to know about trading in general by visiting a few threads on FF.

The average retail trader is inexperienced and have not grasp on how the market works. Theres a reason FF harbors more inexperienced traders than any other website in the world. There are truly dedicated noobies who are looking to learn as much as possible about the market by following and asking legitimate questions. The problem is most of those dedicated to learning are asking the wrong traders on FF...
And more sunshine. Thanks, glad I put you on my list
Quoting tommyd
Maybe they do not pay enough attention to the "Longer Trend".

Possibly they spend too much time on short term charts when they have not actually learned how to trade at all.

just a side note.. 95% of "traders"...
having a forex account does not make one a trader.... 95% of those "Attempting" to trade fx fail, I can go with that maybe..
Most of those Attempting it will never be traders and out of that small minority that will become traders many (myself included) are probably years away from that goal.

jmo.
I agree 100% with this post. Every day of the week, fresh meat (retail traders) enters the FX market. It takes a tremendous amount of hours to master trading. As an example, there are only 12 NFP reports per year. That is not nearly enough time for a new trader to understand the dynamics of the NFP report in their first couple of years. Because it is not so much what happens on that one NFP report day, but the week before and after that causes problems for traders. Also, you can't forget about the market dynamics of the FOMC announcements. There are too many nuances that occur during these critical times in the market. A new trader can easily blow out an account because the market can act very strangely during these periods. I have only been trading FX for a few years and I have yet to scratch the surface as far as interpreting all of the nuances. Believe you me, the 95% who lose consistently should not all be labelled as traders. Because you are not a FX "trader" just because you place a trade in the FX market.
Quoting Jhig
I take it you've been in the EURUSD thread. LOL You can learn all you need to know about trading in general by visiting a few threads on FF.

You should have seen the Cable thread last week, dozens every day getting smelly fingers from picking tops in a massive uptrend using 5 minute charts full with bells, whistles and christmas trees.

Why do a majority of new traders not make it in this game? They are trying to be too clever for their own good, just find your trend on a higher TF and trade the dips on the lower ones. Forget about CT's until you have a few years under your belt. But that is no fun, lots more rewarding to continuously throw sh!t at the wall countertrending with tight SL's hoping that something sticks and you get lucky.
Well I don't believe that TF has anything to do with being successful as there are successful traders trading 1m-15m charts, but you should damn well be aware of the major trend in the currency, if there is one. Use whatever you are comfortable with.

You could to a higher time frame, have a tug of war with your PnL and eventually lose slowly if that makes you feel better, cause that's what will happen if you still don't understand how it works. Good MM, although one of (arguably the most) important will only make it happen a bit slower if you don't know how to trade.
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