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

  • #41
  • Jul 19, 2010 2:21am Jul 19, 2010 2:21am
Most traders fail because each decision they make is too close to 50/50.

Will I buy now, or wait till the next bar? Will I hold against this retracement, or bail out? Will I double up/down? Scale in/out? Rescue? Kill? Is this the right trend line/channel/breakout/support? Is this the right time scale for the trend? Is the momentum stalling/accelerating? Will I risk 1% for 30 minutes or 10% for two? Will I go to bed now, or take one more trade?

A successful trade involves dozens of such decisions, but every trade is unique. Blanket rules are worse than useless. But I must get most of these decisions right to succeed. I'm facing certain ruin unless each decision is vastly better than 50/50.

Suddenly, 95% failure sounds pretty optimistic.
  • #42
  • Jul 19, 2010 3:47am Jul 19, 2010 3:47am
Quoting CindyXXXX
"Because they're not smart enough..."

"Because they dont know how..."

Thats the easy answer - you could say that about anything, it does no justice to the topic in question.
You're correct of course.

I'd say it's beneficial to look at the market from this possition... It's a zero-sum game, so what actions of mine will, to my detriment, benefit another participant? Buying because price is rising and v.v. is not sufficient reason IMO... all the 'followers' do is increase the profits of the move initiators, and provide them with exit options.

Obviously there are only two positions one could take, and therefore one will always be picking a side, and in theory helping those who have already thrown their chips in that direction.

Regardless, I truly believe you need to think about who's getting fucked. That's where the answer lies... at least for the retail trader who(as scotty said) is not privy to god knows what info.
Living the adventure in my head.
  • #43
  • Jul 19, 2010 3:51am Jul 19, 2010 3:51am
Quoting Leonlorenzo
Regardless, I truly believe you need to think about who's getting fucked. .
lol there we go - now THIS I agree with
Time hides Nothing
  • #44
  • Jul 19, 2010 3:58am Jul 19, 2010 3:58am
There are three pillars to being a successful trader:

1. Talent - You flat out have to have an ability to read charts and interpret price action. A competent mentor can partially fill any deficiencies in this area, if a trader is fortunate enough to find such a person (very rare).


2. Desire - You have to have a strong desire to succeed and be self motivated because there are multitudes of road blocks on the way to being a successful trader.

3. Experience - I don't care how talented or motivated you are; there is absolutely no substitute for experience. There are many things that occur on a FX chart that may appear as a strange anomaly initially, but as you gain experience, you will see that it is a "normal" event. You simply have to put in some screen time, there is no getting around it.
------------------------------------------------------
If a retail trader is deficient in any one of these three areas, he/she will probably be on the wrong end of a lot of trades.
  • #45
  • Jul 19, 2010 4:17am Jul 19, 2010 4:17am
I'm not sure trading is all about being 'right' or 'wrong', 'informed' or 'uninformed', maybe that's why an alleged 95% fail in their endeavours, they spend all their time and energy searching for the illusive predictive indicator or system!

I think Soros sums it up very well in my sig quote......
  • #46
  • Jul 19, 2010 4:21am Jul 19, 2010 4:21am
Deep breath. So... retailers do spend most of the time in drawdown - on EU we're talking about 99% of the time (real figures, not billy bullshit).

I've got around 18 months of retail data now. Since I last wrote about it I've learnt a bit more. Your answer is spread cost, inappropriate position sizing, trend fighting, the necessity of losers in the market (which your own answer nailed in one) and the retailers trading style.

Only the last really needs explanation - consider this. The typical retailer trades small win, small win, small win, big drawdown with escape at b/e, small win, small win etc. This style allows them to win frequently, and to reassure them a mean reversion strategy is the most sensible, while ensuring their inevitable downfall in the trade that never comes back to b/e.

Those big drawdown trades take up a lot of time when they won't be trading anything other than hoping their position moves back to b/e. Aggregate them together and the majority of traders then are in drawdown most of the time. The astute will realise this is simply an inverse R:R style of trading, and doesn't in itself offer any edge nor disadvantage. The polar opposite gives you the risk instead that your account will empty before you hit the jackpot of the trade that runs away with your profits. Probably more likely given the long tail distributions, but still not a certainty.

All that said, retailers do give directional clues - entry points are significant and predictable and patient traders usually have it right. Watch out though - massive fundamentally driven moves drive non-spec money into FX (the exception rather than the rule), and so are a professional's nightmare and a retail trader's dream. Nothing works all the time.
  • #47
  • Jul 19, 2010 4:21am Jul 19, 2010 4:21am
Quoting Leonlorenzo

It's a zero-sum game...
If it was insulated and limited to speculators, perhaps.....but it's not.
  • #48
  • Jul 19, 2010 4:50am Jul 19, 2010 4:50am
Quoting pipmutt
If it was insulated and limited to speculators, perhaps.....but it's not.
Quoting pipmutt
I think Soros sums it up very well in my sig quote......It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
Good points pip - But to be right in the first place you need to be on the "right side" at some stage, and to make more than you lose same thing
Time hides Nothing
  • #49
  • Jul 19, 2010 4:55am Jul 19, 2010 4:55am
Quoting triphop
Deep breath. So... retailers do spend most of the time in drawdown - on EU we're talking about 99% of the time (real figures, not billy bullshit).
.
Quoting triphop
The typical retailer trades small win, small win, small win, big drawdown with escape at b/e, small win, small win etc. This style allows them to win frequently, and to reassure them a mean reversion strategy is the most sensible, while ensuring their inevitable downfall in the trade that never comes back to b/e.
.
Good points triphop but thats a pretty profound assumption to make... How can you speak for all traders. I don't really understand where you got this figure
Time hides Nothing
  • #50
  • Edited 6:23am Jul 19, 2010 5:04am | Edited 6:23am
Quoting CindyXXXX
Good points pip - But to be right in the first place you need to be on the "right side" at some stage, and to make more than you lose same thing
Even a stopped clock is right twice a day, how hard can it be?

I think there's sufficient fundamental and market sentiment information available, and fairly obvious chart patterns on a chart, to make an educated guess about where price might go. If even the professional institutional players, with their army of analysts and economists and sophisticated algos, if even they can't get it right then how can we expect to do any better when it comes to predicting the future?

If we accept that we're unlikely to be able to predict future price with any degree of certainty then what are we left with? Probability. Exploit the times we guessed right and limit the loss when we guessed wrong sounds like a pretty logical approach to me, that way we're fully in control of our own trading destiny despite what the market does. Suddenly trying to predict price direction becomes less of a focus. Now that's what I call a real edge!
  • #51
  • Jul 19, 2010 5:17am Jul 19, 2010 5:17am
Retail traders lose because banks win. Money doesnt just come from nowhere. Not all retail traders lose but most do. There are other reasons, but mainly because if you're short the market, someone has to be the other side and they have no intention of keeping you in that trade. Check out range breakout trades. Watching price action and trading below the low and above the high for the day often retrace after spiking a few ticks, gradually taking retail clients out as it reverses, then its free to go through the levels. Stops are there to be taken out at the end of the day. They see the flow and if they have to move the price to make a load of money. they will.
  • #52
  • Jul 19, 2010 5:31am Jul 19, 2010 5:31am
Quoting Brettus
Retail traders lose because banks win. Money doesnt just come from nowhere. Not all retail traders lose but most do. There are other reasons, but mainly because if you're short the market, someone has to be the other side and they have no intention of keeping you in that trade. Check out range breakout trades. Watching price action and trading below the low and above the high for the day often retrace after spiking a few ticks, gradually taking retail clients out as it reverses, then its free to go through the levels. Stops are there to be taken...
I doubt the vast majority of the alleged 95% losing retail traders trading volume goes anywhere other than to provide in-house liquidity for the marketmakers, banks aren't going to be bothered chasing the chump change residue!
  • #53
  • Jul 19, 2010 6:16am Jul 19, 2010 6:16am
Quoting CindyXXXX
Good points triphop but thats a pretty profound assumption to make... How can you speak for all traders. I don't really understand where you got this figure
No assumption Cindy, I calculated it. EU is still the least profitable pair in retail by a long chalk. It's not all traders - it's their aggregate position, which is disproportionately affected by those trading with almighty drawdowns.
  • #54
  • Edited 6:32am Jul 19, 2010 6:20am | Edited 6:32am
Quoting triphop
No assumption Cindy, I calculated it. EU is still the least profitable pair in retail by a long chalk. It's not all traders - it's their aggregate position, which is disproportionately affected by those trading with almighty drawdowns.
Interesting... Could it be simply because its the most popular and liquid? BTW someone on here was posting the other day about the old "95%" figure and had the EURO as the most profitable at 56% of traders (i know seems kinda high doesn't it) I always thought the EUR was the "easiest" pair.
Time hides Nothing
  • #55
  • Jul 19, 2010 7:36am Jul 19, 2010 7:36am
Quoting CindyXXXX
Interesting... Could it be simply because its the most popular and liquid? BTW someone on here was posting the other day about the old "95%" figure and had the EURO as the most profitable at 56% of traders (i know seems kinda high doesn't it) I always thought the EUR was the "easiest" pair.
Yeah well it's definitely the most popular, but that doesn't affect the overall percentage, though it's certainly the scalper's favourite, and so the spread would be a bigger factor in why so many are on the losing side.

56% was probably the % short. Looking at EU now, it's currently near enough 55% short. Of both longs and shorts currently it looks about 30% of both sides are sitting on profitable positions, meaning losers outweigh winners on both sides. Just another normal day...
  • #56
  • Edited 8:11am Jul 19, 2010 7:51am | Edited 8:11am
Quoting triphop
Yeah well it's definitely the most popular, but that doesn't affect the overall percentage, though it's certainly the scalper's favourite, and so the spread would be a bigger factor in why so many are on the losing side.

56% was probably the % short. Looking at EU now, it's currently near enough 55% short. Of both longs and shorts currently it looks about 30% of both sides are sitting on profitable positions, meaning losers outweigh winners on both sides. Just another normal day...
Where do you get this info trip hop - Thats freakin awesome
Time hides Nothing
  • #57
  • Jul 19, 2010 7:56am Jul 19, 2010 7:56am
Quoting pipmutt
I doubt the vast majority of the alleged 95% losing retail traders trading volume goes anywhere other than to provide in-house liquidity for the marketmakers, banks aren't going to be bothered chasing the chump change residue!
I dont think you've worked in a bank before. Their trade sizes arent as big as you think. They wont chase everything, but tell me how many retail traders were short eurusd expecting parity. Vegas called and they wanted EURUSD at 1.3.
  • #58
  • Jul 19, 2010 8:51am Jul 19, 2010 8:51am
Quoting CindyXXXX
Where do you get this info trip hop - Thats freakin awesome
It's my special proprietary indicator which i'll be selling for a one-off fee. Or ...
hold on a minute:
http://fxtradeinfocenter.oanda.com/o..._and_positions
use aggregate positioning to work out % of profitable and non.

And for ratios of long:short:
http://fxtradeinfocenter.oanda.com/o...osition_ratios
  • #59
  • Jul 19, 2010 9:12am Jul 19, 2010 9:12am
That's just based on Oanda client's positions though isn't it triphop? I think a few brokers publish the same stats, it might be interesting to compare!
  • #60
  • Jul 19, 2010 9:15am Jul 19, 2010 9:15am
Quoting Brettus
I dont think you've worked in a bank before.
I don't need to have worked in a bank, it's the logistics of marketmaking and aggregating clients positions, I shouldn't think the residue is very much in the scheme of things.

For banks to actively try and guess retail traders positions and then manipulate the market in an attempt to trigger their stops would probably be an exercise in futility, and certainly not worth the effort, don't forget 95% lose without any assistance, and their money invariably goes to either the marketmaker or towards paying out the winners rather than to banks!
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