For years, I’ve heard that 90% of traders lose money trading, and they lose it to the 10% who are making money. More recently, it seems that the numbers I hear are 95-5, so even worse.
FXCM recently released a report showing, according to them, retail fx traders received better executions than institutional or exchange traders. In my experience working for two fx brokers, they are exactly right. Retail traders get ridiculously great pricing and fills.
How is it that retail traders are getting better pricing, but they still lose on a higher percentage of trades than institutional and professional traders? I think there are five reasons why retail traders aren’t as successful as professional traders.
1. Execution of Trading Strategy
Through many years of working on a trading desk and talking to customers and banks, I didn’t see much of a difference in the actual trading strategies between our trading desk, the trading desk at a bank, our institutional/professional traders, or our retail trader. Everyone has the same access to charting, technical analysis and pricing analysis.
Professional traders do not simply limit themselves to technical analysis. They know their own trading very well: their tendencies, how much they are comfortable risking, how to minimize their bad trades while maximizing their good trades. It’s more than even that. Good professional traders have scenario analysis that gives them further analysis on their own trading: expectancy, confidence, equity moving average, etc.
Professional traders also tend to look at a potential trade through the lens of many different trading strategies and many types technical analysis. They also have a pulse on the fundamentals behind the products they are trading. They eat, sleep and breathe the markets.
2. Big Picture Oriented
A professional trader and a retail trader might be trading the same strategy and looking at the same chart to make a trade, but the professional trader is looking at many other things to determine the viability of a trade before entering the trade. There is no fear of missing a trade. The professional trader lets the trade come to them…they are not chasing trades.
So what are professional traders looking at that retail traders often ignore? Professional traders are looking at long and short term charts and analysis…and they ask themselves what could happen…how could this trade go wrong…how much could I lose on this trade?
A professional trader looks beyond this trade and is more concerned with the overall market. What could hinder me from hitting my limit? What could cause the market to move against me? When might I need to cut my losses? They aren’t waiting until they are in position to think through these things…they are asking these questions before making the trade.
3. More Discipline
Enough cannot be said about discipline in trading (or any endeavor). The best traders, professional or retail, are all very disciplined. Looking at the last two things that make people better traders, the best traders do their research before entering the trade.
The best traders know why they are in a trade. They know when they are going to get out of a trade. They work orders. Why? Because they have seen what can happen when you don’t work orders. They work stops and let those stops fill if they are due to be filled.
A less disciplined trader will pull their stop because they just know that the currency, stock, commodity is going to go their direction. They just don’t want to miss out, or maybe, they just can’t stomach losing on another trade.
Most professional traders answer to someone. There is a boss, an investor, another trader. There is almost always someone that a professional trader has to answer to and make a case for each and every trade. Sometimes, they don’t have to make a case of the trade beforehand, but they will need to answer questions if the trade goes bad.
Those questions are almost always around the other points of this article. “Didn’t you see that the daily chart was showing this and was clearly a strong trend in the opposite direction?” “Where was your stop order to protect from this happening?” “You risked 100 ticks to gain 10?” “Why did you take the trade?” “Why did you move your stop?”
Trust me. These are just a tip of the iceberg in terms of questions asked when a trade goes sour. It is a very uncomfortable time, and the trader needs answers to why they did everything.
My point is this: How many retail traders have to make a case to someone before making a trade? Sometimes, it is good to get someone else’s opinions on a product before trading it. After working on the desk for 9 years, I found that my fellow traders hardly ever agreed with my analysis. At the very least, they had very good insight that I was missing.
5. Patient and Calculated
Professional traders are very competitive and very confident. The best traders wait until the odds are stacked in their favor before trading. I love the Jim Rogers quote: “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”
Like I said earlier, the best traders let the trades come to them and don’t go chasing after trades. They are patient. They are calculating. They take risks and lose money, but the money they lose is calculated beforehand. The risk of them losing is small, as is the amount of money being risked.
The point of all of this is that you don’t need tighter spreads to be more profitable. You probably don’t even need better charts or a new trading strategy.
Most likely, all you might need is more insight and better discipline on applying that insight. Just like most things in life, more knowledge is a great thing, but discipline can really reap positive rewards.