One can easily find the names of some excellent investors on any social media investment club on Twitter or Reddit under the investment theme. Believe it or not, is your choice, but most successful traders use different accounts simultaneously across different time frames to ensure everyone always sees their success.
On the other hand, millions of traders fail and go empty-handed on their portfolios, especially when using leverage. Take, for example, the UK’s Financial Conduct Authority (FCA) requires brokers to disclose the percentage of their accounts in the field of trading unprofitable derivatives. According to the data, 69% to 84% of retail investors lose money.
Similarly, a study by the U.S. Securities and Exchange Commission found that 70% of forex traders lose money every quarter. eToro, a multinational broker with 27 million users reported that nearly 80% of retail investors lost money in 12 months.
The same pattern appears in every market across continents and for different decades: retail traders rarely remain profitable. However, new but experienced investors claim that they can overcome that bias thanks to ingenuity or mass marketing campaigns from influencers, exchanges, and algorithmic trading systems.
Here is the reason behind the inevitable failure of retail investors. There is no easy solution other than long-term psychology and the strategy of buying a fixed amount weekly or monthly.
The exchange’s server stops working and transactions are undone
In June 2021, the U.S. Financial Industry Regulator fined Robinhood $70 million for allegedly “causing widespread and substantial harm” and providing “misleading information to millions of its customers” beginning in September 2016. Specifically, the regulator confirmed that the decommissioning of the platform in 2018 affected customers’ ability to execute buy and sell orders during periods of high volatility in the market.
On 2022-03-08, London Metal Exchange (LME), the largest exchange in Europe canceled all trading in Nickel futures contracts and postponed the delivery of all contracts that had already been settled. The reason given by Bloomberg was that “short positions were unprofitable, in a major squeeze that enticed the nickel producer as well as a major Chinese bank.”
Note that such a decision would be a lot worse for a broker who decides to deliberately pause their platform. In that case, the customer can at least choose another intermediary. Payback or trade cancellation is much more difficult because users are already expecting profits, or maybe even being insured. This means that trading is part of a broader strategy.
See also: Sign up for Binance & Simplest User Guide for Beginners
High-frequency trading and unlimited funding
Professional traders use a location server, placing the server as close to the exchange’s data center as possible as this significantly reduces line latency. These exchanges offer premium services to high-end clients, including on-site private residential servers.
Besides requiring a significant amount to cover costs, location servers offer high-frequency traders the benefit of running pinging strategies, using a series of smaller orders to determine the range of whales trying to enter or exit the market. In addition to being heavily funded, these Arbitrage traders often get extra money from exchanges. These benefits essentially mean they can trade without a mortgage, similar to having credits, giving them a big advantage over retail investors.
Where is the evidence? The insolvency of Three Arrows Capital (3AC) negatively impacted the Deribit exchange, which was forced to cover its own losses. Furthermore, Bitcoin Cash (BCH), Roger Ver is being sued by exchange CoinFLEX for an alleged $84 million in alleged liquidity debt.
Retail entrepreneurs need to understand that there is no room for amateurs and need to recognize the complex relationship between exchanges, venture capitalists, market makers, and whales. Whether the partnership is on paper or not, it ensures that these actors have an advantage in terms of access to pre-seed funding, listing, and market rounds.
The only way for investors not to lose money is to give up trading and avoid leveraged trading. In fact, investors with six months or more of experience have the opportunity to profit from each of their positions.
