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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Recommended next reads

What Do Retail FX Traders Really Want? Demetrios Zamboglou PhD 3 years ago
If Shorting Volatility was the Right Play, Why Did… Jack Lee 6 years ago
Retail FX in Japan, 2020 Preview Javier Paz 4 years ago

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:

  • 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.


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