The Harsh Truths About Trading The Financial Markets.

*Here are some truths and facts about trading the financial markets*

Welcome back to the blog! In this post I am going to show you some facts and figures about traders and trading the financial markets. I will also tell you some honest truths that I have learnt so you can see what it takes to become a trader of the financial markets. Let’s get right to it!

1. You are statistically likely to fail at trading.

Yes, you did read that correct and there is clear data to support this statement. As a retail trading participant in the financial markets, you are statistically likely to fail at trading and lose money. The table below shows a selection of popular retail trading brokers and the percentage of traders that win and lose money when trading through them.

As you can clearly see, every single one of the brokers in the list above records that more retail traders lose money than win money when trading. Finance Magnates have been kind enough to calculate the average number of traders who lose money and that figure is just under 75%.

That means you are almost 3 times more likely to lose money than win money as a retail trader!

2. More capital doesn’t always guarantee greater returns.

First things first, returns and performance should be measured in percentage gain and not as a monetary value. This makes it much easier and fairer to compare the performance of multiple investments and traders.

A trader with £100,000 in capital who returns £20,000 in profits in a single year is no better than a trader who returns £1,000 from £5,000 worth of trading capital. The percentage return is still 20% per annum for both.

What I will tell you all is that having access to more trading capital DOES NOT mean your returns both monetarily or as a percentage are guaranteed to increase. Just because you are successfully trading or investing £10,000 does not mean you could successfully manage £100,00 or £500,000 and achieve the same performance. With greater capital comes great risk and monetary values have a profound effect on a traders psychology.

I have see “account flippers” who open leverage trading accounts with £250 and double or triple their money in a few days or weeks. However they soon go on to lose a large proportion of their returns and there is a very small likely hood that they could achieve the same success crippling a £10,000 or £100,000 account in the same way.

3. You will lose money at some point.

You will not win every trade you take, that is a fact and therefore at some point you will lose money. Your trading strategy and its performance including; average win rate %, reward:risk ratio per trade and trade frequency will all have an impact on when you will lose money and how much. Even then you will still be at the very of natural distribution and non-systematic risk.

Let’s assume you have a strategy with a win rate of 66% and you place 100 trades in the next month. There is a 35% chance that you will lose the next 5 trades in a row.

The chart above shows the probability of a losing streak depending on the win rate of your trading strategy using binomial distribution (only 2 outcomes of a trade, win or loss). There is every possibility that you might start trading and go right in to a 5 trade losing streak or even a 10 trade losing streak and therefore you could one of the unfortunate retail traders that loses money right away.

All that matters is that you should be aware that at some point in your retail trading career, you will lose money.

4. Market Makers don’t move price to stop you out of trades.

There is a popular myth amongst new traders/retail traders that there are participants in the markets called market makers who actively seek to manipulate price, create price spikes and search for traders stop loss orders in order to make money. This is simply not true! A market makers job is simply to “make” the market. That is that they are there to keep markets moving by providing liquidity and taking the opposite sides of trades so they will be actively offering to both buy and sell assets or securities.

The most common market makers are brokers themselves unless they are explicitly a “no dealer desk” broker and act purely as a middle man for your trading. A broker that is also a market maker might have a conflict of interest with you because if they are taking the opposite sides of your trades (buying when you sell), they will make money when you lose money and vice versa.

The way market makers make money is via spread so that they naturally buy low and sell slightly higher. For instance, a market maker in XYZ stock may provide a quote of $10.00-$10.05, 100×500. This means that they bid (they will buy) 100 shares for $10.00 and also offer (they will sell) 500 shares at $10.05. Other market participants may then buy (lift the offer) from the MM at $10.05 or sell to them (hit the bid) at $10.00. Market makers provide liquidity and depth to markets and profit from the difference in the bid-ask spread.

I have talked about spread fees and lowering trading costs in a previous blog post which you can find by clicking here.

4. Freedom is important.

Spending every hour of every day infant of screens, watching charts and trading is not a realistic expression of what it is like to be a financial markets trader. If you go in to retail trading with this mindset and try to emulate what you might dee on social media, you will soon learn a hard lesson.

Quality over quantity is very important in trading in my opinion. I do not day trade every day because it is too high frequency, too stressful and I believe it is even harder for traders to become successful at day trading. Instead I like to place well analysed, strategic trade positions that might last a few hours or a few days, weeks or even months.

This leaves me with free time to stay healthy and relax my mind. Trading is stressful. Dealing with constant financial risk and being 100% responsible for your success or failure can cause weak minds to struggle and this can impact your performance. It is important to make use of being a retail trader and take time off from work to relax and get away from the markets.

“Having no open trade positions is a trade position in its own right.”

End note.

My intentions for this blog post are not to put you off trading or scare you away from learning the art of technical and fundamental analysis. There is a very good chance that with the right mindset, enough time and dedication that you can put yourself in the minority and become a successful trader.

Not all hope is lost! The data in point 1 of this blog post is potentially a little misleading because it does not take in to account the monetary value (quantity) of retail traders that lose money vs traders that win money . I believe that if this was to be taken in to account then actually the data would show a much different picture because the minority of retail traders who are successful most likely win much greater sums of money from brokers vs the individual trader who loses money.

One good, steady and successful retail trader likely earns the same amount as hundreds of the small account flippers and “gamblers” who come to the financial markets looking to win big quickly. And this is where you should see potential for success.

If you are interested in learning my personal trading strategies, please consider my Mastering The Markets – Retail Trading Course. Head over to my Trading Education page to check out all of my education packages and the deals available.

Useful Links:

All my technical analysis is done using the TradingView platform. You can get access via the link below.

My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.

FTMO Trader Funding Programme.

Thanks for reading and please don’t forget to LIKE, SHARE and FOLLOW my blog to stay up to date with the latest market analysis and trading education posts.

DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.

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