Why do most of the retail traders (~90%) lose money? And how they can be more successful? (2024)

Retail traders are individuals who trade stocks, currencies, commodities, or other financial instruments for their accounts rather than for an institution or a professional firm. Retail trading has become more and more widespread in recent years, thanks to the availability of online platforms (such as Robinhood), low-cost brokers, social trading platforms, and, of course, social media. However, retail trading is also hazardous and challenging, and most retail traders end up losing money. According to various studies and reports, between 70% to 90% of retail traders lose money every quarter. This article will discuss the main reasons retail traders lose money and how they can enhance their performance and profitability.

Firstly, it has been observed that retail traders often need help in making a profit due to the absence of a well-defined and consistent trading plan. A trading plan essentially outlines the rules and principles that steer the trader’s decisions regarding which assets to trade, when to do so, what amount to invest, and how to manage risks and exit positions. A trading plan helps the trader to avoid emotional and impulsive trading, which can lead to overtrading, chasing losses, or holding onto losing positions too long. A trading plan also helps the trader identify and exploit market opportunities based on their analysis, strategy, and edge. Without a trading plan, retail traders are more likely to trade randomly, inconsistently, and irrationally.

Another reason why retail traders lose money is that they do not have an asymmetrical risk-reward ratio. This means they risk more than they stand to gain on each trade, or their potential losses are more significant than their potential profits. An asymmetrical risk-reward ratio allows the trader to be profitable even if they are wrong more often than they are right. For this purpose, the investors should check the Sharpe or Sortino ratios. Those ratios represent the potential earnings in relation to the standard deviation of the stocks. An additional tip would be „checking out for the maximum drawdown“; as an example, ourAP Long-Short strategyhas a maximum drawdown of -17.10%, suggesting a rather safe investment opportunity compared to, let’s say, S&P500, which has -47.51%.

If you made up your mind for it, there are also tools suitable for maximizing returns, minimizing drawdowns, or maximizing Sharpe. Our Portfolio Manager tool would be a great example and useful tool for people who knows what they want.

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How can retail traders be more successful?

While there are no guarantees when it comes to making money through trading, retail traders can improve their chances of success by following the proper steps. Though it may not be an easy process, with the right strategy, achieving success is certainly possible. First, they need to develop and follow a trading plan that suits their personality, goals, style, and edge. A trading plan should include the following elements:

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  • A market analysis (fundamental, technical, or quantitative)
  • A trading strategy (entry and exit signals)
  • A risk management system (limits, stop-losses, take-profits, etc.)
  • A proper performance evaluation

Second, they need to adopt an asymmetrical risk-reward ratio that allows them to be profitable even if they have a low win rate. Third, they need to be disciplined and patient in executing their trading plan. Fourth, they should not let their emotions or external influences affect their decisions. Fifth, they should also avoid overtrading or undertrading. Finally, they need to learn from their mistakes and successes, and they should constantly seek to improve their skills and knowledge.

And as an alternative, there is always an option to ask for financial advice or invest in pre-existing actively managed funds.

In conclusion, retail trading is challenging and risky, requiring much preparation, discipline, and skill. Most retail traders lose money because they do not have a clear and consistent trading plan and a proper risk-reward ratio. To be more successful, retail traders need to develop and follow a trading plan that matches their edge and style, adopt an asymmetrical risk-reward ratio that allows them to be profitable even with a low win rate, be disciplined and patient in executing their trading plan, and learn from their experience and feedback.

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Why do most of the retail traders (~90%) lose money? And how they can be more successful? (2024)

FAQs

Why do most of the retail traders (~90%) lose money? And how they can be more successful? ›

In conclusion, retail trading is challenging and risky, requiring much preparation, discipline, and skill. Most retail traders lose money because they do not have a clear and consistent trading plan and a proper risk-reward ratio.

Why do 90% of traders lose money? ›

It is said that almost 90% of people lose money in intraday trading. Most of the intraday traders lose money because they fail to understand the market movements and end up taking the wrong decisions.

Why do so many retail traders lose money? ›

Lack of Effective Risk Management

In-Depth Insight: Inadequate risk management is a critical factor in retail trader losses. It involves setting stop-loss orders, determining position sizes, and managing overall portfolio risk.

Why do 90% of forex traders lose money? ›

The reason many forex traders fail is that they are undercapitalized in relation to the size of the trades they make. It is either greed or the prospect of controlling vast amounts of money with only a small amount of capital that coerces forex traders to take on such huge and fragile financial risk.

Why do 80% of traders lose money? ›

Lack of trading discipline

This is the primary reason for intraday trading losses in the intraday trading app. Trading discipline has to focus on three things. Firstly, there must be a trading book to guide your daily trading. Secondly, you must always trade with a stop loss only.

What is the 90% rule in trading? ›

It is a high-stakes game where many are lured by the promise of quick riches but ultimately face harsh realities. One of the harsh realities of trading is the “Rule of 90,” which suggests that 90% of new traders lose 90% of their starting capital within 90 days of their first trade.

Why do retail traders fail? ›

The truth is, most traders lose money for one simple reason: They don't have a plan. These losses can be substantial: The bull run during the pandemic saw retail traders lose more than $1 billion, according to a recent study.

Why do 95% of day traders lose money? ›

The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.

Do retail traders actually make money? ›

Most traders are not profitable. Can Retail Traders Actually Make Money? Retail traders can make money if they discipline themselves to learn a specific trading style and use risk management techniques. It isn't easy to make money consistently as a trader, but it's possible.

Do successful traders lose money? ›

As much as 95 per cent of day traders lose money in the market, it demands an investigation. Intraday trading is the most popular, yet data suggests that most intraday traders lose money.

Why do traders lose money in trading? ›

Simple mistakes that intraday traders commit include; averaging your positions, trying to outsmart the market, overtrading to recover losses, focusing too much on hot tips etc have created many Indian stock market loss stories. Interestingly, 90% of the intraday traders are losing money in intraday trading.

Why do many traders fail? ›

Not having and not following a trading plan is a big reason most traders fail. People without a plan are making an assumption that they are smarter than people who do this for a living, and therefore they don't need to prepare, plan, or practice.

Do retail investors lose money? ›

Investing is a zero-sum game where one person's win is another's loss. The majority of retail investors lose money, a fact underscored by risk warnings on nearly every regulated broker's website.

Why 99% of traders fail? ›

The most common reason for failure in trading is the lack of discipline. Most traders trade without a proper strategic approach to the market. Successful trading depends on three practices.

How much money do day traders with $10,000 accounts make per day on average? ›

With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].

How many day traders go broke? ›

Studies have shown that more than 97% of day traders lose money over time, and less than 1% of day traders are actually profitable.

Why 95% of day traders lose money? ›

The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.

Why do so many people lose money day trading? ›

Common Mistakes That Lead to Losses

They start to trade without a solid plan. They risk more than they can afford to lose. Beginners often use leverage in trying to make a killing and then lose all of their trading capital.

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