Last Updated on 10 February, 2024 by Trading System

Every retail trader who tries to trade the markets soon understands that making money is hard. In fact, most retail traders will never make money long term, if you go on pure statistics.

So can retail traders make money?

Yes, retail traders can make money. However, it is not easy, and to make money as a retail trader you will need a strategy, a lot of time and some patience. In fact, becoming a consistent retail trader might take several years, but once you are there, it certainly is worth it! 

Let’s explore why most traders fail, and what you can make to succeed in the markets. In fact, as a retail trader, you can so some things that institutional traders cannot, so why not use that to your advantage!

The Top Reasons Why Retail Traders Do Not Make Money

There are several factors that play a role in keeping traders from succeeding. Here we have listed some of the most common ones!

No Real Trading Strategy

In trading, the one single most important tool is your trading strategy. The trading strategy dictates when you should enter and exit your trades, how much you should risk, and should preferably be tested on historical data to verify that is has worked historically.

Many people who are new to trading believe that they have a trading strategy as soon as they have written down some rules that they have heard of. While that indeed is a trading strategy, it probably is not a trading strategy that will work in live trading. The internet, and to some extent books, is full of trading ideas and concepts that are laid forward as working trading strategies. However, the harsh truth is that nearly none of them work!

For the so-called “trading gurus”, who do not know how to trade themselves but teach anyway, combining a few indicators and bringing up some examples of how you should trade, is an easy task.

Unfortunately, many new traders fall for these scams and start trading things that do not work!

They Risk Too Much

So, let us assume that you have a functioning trading strategy, and want to get as much out of it as possible. It is easy to get excited when you realize that you have something that works in the markets. In that excitement, many new traders make a fatal mistake, that very likely will bring an end to their trading career.

They start risking too much.

In fact, even the best strategy you can find will have a drawdown period, meaning that it will have a series of losing trades. If you risk too much, this small bump in the equity curve could potentially completely wipe you out!

Related reading: How Do Traders Make Money?

They Impose their views on the market

The market will not obey anyone, and as such, you should never try to impose your will on the market. Even if this does seem quite obvious, a majority of aspiring traders do not follow this advice, and the reason is quite simple.

When we search the web, we are bombarded with information about trading that inevitably will start to change our views of what is possible, and how trading should be done. Once we try to profit in the markets by making use of these views, or biases, we are unaware that they affect us.

For example, if you have heard that you can double your money in the market every year, and you only make 30% your first year, you might increase your position size until your risk of losing all your money is way too high!

Or, you might think that one indicator should work in a specific way, and therefore continue trading a losing trading strategy.

In trading, you are always better off if you let the market show you what works and not. Do not be surprised if you many times find that what you thought would be the perfect strategy, actually works better when completely turned upside down!

Trading Too Early

Traders, like people in general have a tendency to overestimate their capabilities. In trading, this often results in traders going live far too early. Trading takes a lot of training, and it is unrealistic to expect that you are going to be able to make a lot of money right in the beginning.

That is why starting to trade on a simulated account first is a good idea. Then, as you begin to make money consistently, you can move on to trading a small sum of money, and add more as your experience grows.

Giving Up Too Early

Trading will take time to learn, and you will run into bumps on your way there. This is extremely frustrating, since there often are no definite answers to the issues that you are facing.

Combining this with the fact that you most often are going through this on your own, it is no wonder why the thought of giving up arises sometimes!

However, profitable traders are not successful because they did not run into issues. They are successful because they overcame their challenges through hard work!

The Disadvantages of Being a Retail Trader

As a retail trader, you are on your own competing against traders and larger trading firms that have a lot more experience than you. And like if that was not enough, you do not have near the manpower and economic muscles that hedge funds and trading firms have. Hedge funds that operate with a lot of capital pay very well and therefore often succeed in attracting the brightest minds in the industry.

However, this issue can to some extent be solved by teaming up with other traders, and start working together!

It might indeed be discouraging to take up the fight against so seemingly ascendant competitors. But the fact is that you do have a chance!

The Benefits of Being a Retail Trader

While you do not have the economic muscles of trading firms and hedge funds, there still are advantages to being a retail trader! When hedge funds struggle to enter positions without moving the market with their massive trading volumes, a retail trader with a smaller capital will be able to enter and exit the markets without having advanced order planning in mind. The trading size of a retail trader simply is too small to have any significant impact on the price of securities, given that you trade in reasonably liquid markets.

With a smaller capital, you will be able to take advantage of market inefficiencies that the larger players never can, as a result of their sheer size! Therefore there are a lot of edges and trading strategies that you can use in your trading, that the institutional traders never will go after!

Another benefit of being a retail trader is that you do not have to be in touch with investors that wonder why you do this and that. Running a hedge fund can be a tiresome experience, if you constantly feel monitored by people who do not have a clue about what you are doing, and call you up as they see that their investment is not moving according to their naive view of reality.

Summary

You indeed can make money as a retail trader, but it will not be easy! You will have to get rid of your biases and keep working, even when everything feels hopeless.

While being a retail trader and working on your own comes with many difficulties, you do enjoy some advantages that the larger institutional traders do not!

If you enjoyed this article you might also like our other articles answering common questions traders have!