Retail Investors Don't Make Money In The Markets!


Retail Investors Don't Make Money In The Markets!

What chance does a retail investor have to profit?

March 25, 2022

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This week's midweek commentary is titled:

'Retail investors don’t make money in the markets!’

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

And there is no denying that it’s true.

There have been a number of studies that show between 70-90% of retail traders lose money. With those stats staring you in the face, why even bother getting started?


Why is trading so hard, and why are the performances of the inexperienced quite so bad?

Don’t 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 liquidate them by market close.

This is a tough game to play and you won’t see much of it on The Portfolio Platform.

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.

Robinhood offers commission free trading, but they do that by selling the order flow to those sophisticated hedge funds mentioned above. They also take money from you every time you trade via the bid/offer spread. You are paying a higher spread by using these broker platforms and trading too much, 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.

A recent study by Princeton professor Burton Malkiel concluded that Robinhood investors are inexperienced, so they tend to chase performance. The layout of broking apps draws attention to the most active stocks, as well as those that have gone up the most recently which causes users to buy them after the move.

Social sites herd traders to make the same decisions as each other, temporarily causing a bubble, which inevitably bursts. They found on one site, 97% of all individuals who persisted for more than 300 days lost money, and only 1.1% earned more than minimum wage from it.

Of course, there are those day trading gurus out there selling courses and who themselves may be successful; maybe they are, maybe they aren’t. chances are, anyone making millions from trading, isn’t going to spend time teaching a course.

Either way, it’s not much different than getting lessons from Roger Federer and then thinking you can then play in Wimbledon. I’m sure The Fed would have a ton of valuable advice to give you, but that still doesn’t mean you can go out and earn millions on the pro tennis circuit.

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, (apparently this is a real thing).

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.

As Mike Tyson once said: “Everyone has a Plan Until they Get Punched in the mouth”.

Sticking to a trading plan is difficult in good times and bad. We’ve talked through the emotions many times in the past. Fear and greed can ruin any good system.

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 favour.


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.

There’s no way to remove all emotions, but there are ways we can improve our decision making despite them. One thing that helps, is time and experience. Our traders at TPP have the experience that they won’t let a bad run, or even a good run, make them deviate from a strategy that works.

“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.

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

If a rules based system has worked well in the past, that strategy is likely to succeed in the future (again, of course there are no guarantees).

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.

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 is a quick way towards increasing losses, or more likely, not making back the drawdown during a poor period.

Here is a graph showing the movement of the S&P over a week:

This is what happens when you look closely at any performance over a short time frame: ups and downs and no real indication of what to expect.

Every strategy is going to experience some tough times. It’s just how the markets work. Sticking with one that you chose and has worked in the past, is usually the right decision.

If each strategy averages 3 bad months a year, surely the best time to choose it, and therefore the worst time to leave it, is after three bad months! (don’t start doing this either, it was just an example 😊).

With this in mind, we hope it makes sense that the best thing to do on TPP is set it up and leave it.

Switching strategies or turning them off on a bad run is no different to selling low and buying high. Don’t do it, stick with the plan.

No strategy is infallible, so don’t switch from one to another because one had a bad month, and the other had a good month; things tend to average out in the long run. Give the trader time, and the performance curve will flatten.

I showed you the graph of the S&P over a week, well here is the same index over 20 years.

It’s an investment, ignore the day-to-day as the bumps in the road are ironed out over time. If anyone ever shows you a graph that ONLY goes up, the chances are it’s a Ponzi scheme.

Hype and Hope

Another problem 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 strategy that promises the same, easy rewards, throw their money in, bail after trouble, and repeat until their trading capital has vanished.

Trading different strategies is almost as silly as trading yourself. On The Portfolio Platform we only select the best we can find. We’ve done the research so you don’t have to. Our traders have experience, and performance histories, if they didn’t, we wouldn’t allow them on.

And don’t panic if you don’t get results immediately………Welcome to the real world. Give it time and solid performers will continue to perform.

As stated above, historical performance isn’t an assurance of future performance, but it can give you a feel for what to expect. 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.

Avoid the Madness and the volatility

This list of reasons why retail traders struggle is far from exhaustive. We could add many more like insufficient capital, trading a system that’s too complex, trading instruments that are too expensive for their account, overleveraging, overtrading, and so on. Maybe we’ll look at these in weeks to come.

Designing an algorithmic trading system means you can alleviate a lot of these problems. Nothing is perfect, but it goes a long way towards taking the emotional decisions and cognitive biases out of trading.

If you still want to do it yourself, good luck.

BUT letting TPP do the trading for you, gets rid of the decision making and puts it in the hands of professionals.

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 built The Portfolio Platform to help. We only showcase the best strategies we can find. Build your portfolio, and let it go to work. If you would like to know more, please contact us.

Please do contact us if you have any questions. You might not have known you were looking for us, but you found us.

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“TPP might just be about to revolutionise investment for the retail market.”

- London Stock Exchange 2020