“Retail traders don’t make money in the markets!”

If you have ever been interested in trading, you probably have heard this sentiment before.

And, to a large extent, it’s true.

There have been a number of studies that show 70-97% of retail traders lose money. With those stats staring you in the face, why even bother getting started?

Actually, for most of you reading this, just close the window now and don’t come back, you will lose money.

Don’t get started.

For those still here, we can dig a little deeper and try to understand why the performance of most traders is so bad.

Day Trade Your Savings Away

Most of these retail trader studies focus on day traders - traders that may execute dozens of trades during the day and close them out by market close.

This is a tough game to play.

For one, you’re playing in the area of a lot of more sophisticated hedge funds and professional traders who are trading on news and order flow. It isn’t likely you’re going to be able to outcompete them.

Additionally, you’re paying a lot of transaction fees.

Yeah, Robinhood offers commission free trading, but they do that by selling the order flow to those sophisticated hedge funds mentioned above. This means you’re paying a higher spread by using these platforms, which is only going to continue to eat into your profitability.

So, if you want to make money as a retail trader, it’s probably best to avoid the short term day trading strategies.

Of course, there are those day trading gurus out there selling courses and who themselves may be successful. These are the ones who didn’t get wrecked and may either be very talented or very lucky.

Either way, it’s not much different than getting trained by Michael Jordan and then thinking you can go play in the NBA. I’m sure MJ would have a ton of valuable advice to give you, but that still doesn’t mean you can go out and earn a multi-million dollar NBA salary.

Risk Management

Risk management has never been high on the list for retail investors. It’s typically presented with all of the passion normally reserved for buying new floor mats.

Exiting with a small loss after a stop was triggered, is far less exciting than posting your latest “loss porn” image on Twitter.


Work by guys like Spitznagel and Taleb have helped bring ideas around tail risks, hedging, and risk management in general into the popular consciousness, but despite these efforts, YOLO traders remain in vogue.

Moreover, many online “gurus” selling you a charting strategy frequently ignore risk management all together and focus instead on esoteric patterns to determine entry signals (or just show off their sweet monitor set-up).


Without proper risk management strategies in place, it’s no surprise that retail traders fail to be profitable.

Risk management in trading ought to be your top priority.

Tests have shown that even random entry signals with good risk management principles can yield profitable strategies. Yet, this is never the focus of retail traders who consistently seek to find the perfect entry or predictive model.

This can be resolved by having strict rules in place that are automatically executed when risk levels are exceeded to bring that risk down to normal levels. This can include stop losses, rebalancing traders, hedging, or a host of different strategies. Whatever you choose, it needs to be done without question according to your backtested results.

Everyone has a Plan Until they Get Punched in the Face

Sticking to a trading plan is difficult in good times and bad.

It’s far too easy to feel like a genius when things are going well, like you can do no wrong and begin to take more risks or follow your gut instead of your plan. Possibly the worst thing that can happen is for these bad decisions to work out in your favor.


It only reinforces those feelings of invincibility even though you have clearly deviated from your strategy which is going to lead to future bad decisions.

Better to get that knocked out of you sooner rather than later.

People are emotional (even this guy).

There’s no way to remove all emotions, but there are ways we can improve our decision making despite them.

Perhaps the best way is to automate your trading with a trading bot. Something that will take your rules and implement them without any human intervention whatsoever. All you need to do is sit back and watch at a high level to ensure that everything makes sense.

Lack of Tests

“Past results do not promise nor infer anything regarding future performance.”

We’ve all heard this phrase. This is the standard disclaimer that’s associated with every financial ad or product.

It’s true. The world is unpredictable and always changing, so just because some trader/company/industry/country/whatever did great over the past 10 years doesn’t mean it’s a sure bet over the next 10 years.

But that doesn’t mean looking at historical data has no value.

Rules based, quantitative systems can be backtested against historical data. The idea is to see how a strategy would have fared if you had run it 10, 20, 30+ years ago. A good strategy that is likely to succeed in the future (again, no guarantees) would be able to perform well over a variety of market environments.

While backtests are never perfect, they do give you an idea of the types of returns and risks you’ll be able to expect in the future.

Most retail traders never bother with this step.

They don’t do the research to see if their new system or strategy would have worked.

Even if they do have a viable strategy, by not looking at historical returns, they don’t have a good feel for the risks they’re taking. So when they encounter a large drawdown, they bail and switch to a new strategy (with less capital, of course) rather than seeing it through.

Strategy Switching

Every strategy is going to experience some tough times. It’s just how the markets work.

Take a look at the equity curve below, it shows the growth of $1 invested from 1990-2007 in a given strategy.


This is not how typical equity profiles are structured. In fact, if you ever see someone pushing a strategy that is just up-and-to-the-right - run for the hills.

This particular equity curve comes from none other than Bernie Madoff, architect of the most infamous Ponzi scheme of this century.

The trouble is, too many retail investors get involved with trading after seeing up-and-to-the-right equity curves. Or after seeing a title like “How I turned $5,000 into $500,000 by trading!”

Even if they happen to jump in on a legitimate system, they bail at the first sign of trouble because the reality of trading - with its ups and downs - didn’t meet their expectations of consistent and reliable returns.

So, they flounder and find a new system that promises the same, easy rewards, throw their money in, bail after trouble, and repeat until their trading capital has vanished.

As stated above, backtests aren’t perfect, but they can give you a feel for what to expect when you run a given strategy. This can prepare you mentally for when those tough times come - you know you’ll take some losses but sticking to the strategy will pay off in the long run.

Anything worthwhile - including trading success - is going to have good times and bad, the key is to persevere through those bad times knowing that you’re on the right track.

How You Can Avoid the Madness

This list of reasons why retail traders struggle is far from exhaustive. We could add other reasons like insufficient capital, trading a system that’s too complex, trading instruments that are too expensive for their accounts, and so on. Maybe we’ll hit all of these in a future post.

Designing an algorithmic trading system and letting your bot trade for you can alleviate all of these problems. It’s no panacea - you can always intervene in your system - but it goes a long way towards taking the emotional decisions and cognitive biases out of trading.

This step alone will separate you from 99% of retail traders who are going to get caught up in get-rich-quick trading strategies and bouncing from guru to guru.

We offer a robust algorithmic trading platform that allows you to develop and test strategies without writing a single line of code. Once you’re satisfied with it, deploy your bot and let your bot work for you.

It never gets tired. It never gets emotional.

Try out our free demo here!