The real reason ‘retail’ traders fail

I’ve been spending a lot of mental ‘time’ looking at the approaches of Jimmy Young, Chris Lori and especially @Trader_Dante off the twitter in the last couple of weeks. This also comes back to a throw away comment that Anton Kreil made at his ‘Traders of the Future II’ seminar. Added to that a spell watching Mark Douglas on youtube and then a couple of other excerpts by Brett N. Steenbarger so my brain is well and truly cooked with respect to trading.

Sometimes all this marinating can produce questions and maybe a little insight.

We all know the statistic about ‘retail’ traders have this appalling 80% – 90% rate of failure and it takes so much time to get good etc. Now of course psychology plays a huge part but prompted by this question I think I’ve gotten some way to understanding why this is true.

Retail traders are told that charts are at cause in the market or to put it another way…

Retail traders think what happens on the chart causes further stuff to happen.

This is partly correct but if something is partly correct it’s also not right either 😉

A chart is an effect – it’s the visual representation of a bunch of transactions and is only slightly causal in the grand scheme of things. A chart is an outcome. Believing that what you see represents the market and attempting to use this as a means of gaining an edge is likely to be a challenge because you’re not thinking about the totality.

Here’s a suggestion of the whole system

Now you can see that charts represent about 10% of the actual information available. Lets break the other elements down.

News = Information coming in that will have either a short term or long term (macro) effect

Market = The sentiment of the majority of the market at the time(frame) you’re in

Traders = Making bids/offers as the conditions change across multiple time-frames

So while there is a feedback loop between traders (who can move the market) and what happens on a chart (price) this image does not have the same weight for traders as the poor retail guy believe it does. For a retail trader the chart is the market. This is a key difference and a mental trap for every retail trader. It definitely pays to think outside of the chart.

For a trader with multi-millions at stake the chart is a result of their actions based on market opinion, macro economics, news and very importantly what other traders are doing. Here’s another attempt at a diagram as it relates to the actual situation…

Retail traders think the chart lives at the top on it’s own and has way more influence than it does…

What’s at cause here moving the squiggly line on the chart?

Yes, it’s how the Trader with a capital T is reacting to events, the market and to a certain extent where the price is in relation to other points. Now, what are the consequences of this for all us retail guys out here in the wilderness? What can we do to level the playing field? Well it helps to be asking the right questions for a start.

Retail newbie question – What’s the price/indicator/chart doing?

Retail improved question – What’s the market doing and how can I join in with low risk?

However here’s the question I believe you really need to ask…

How are Traders viewing the market and where can I enter for minimum risk to ride on the back of their actions

The market doesn’t move at all until a bunch of traders decide ‘we’re going to go this way’ because you and I as retail traders are simply riding on the chart which is the result of the actions of others.

A clear ‘short-cut’ for retail players is to learn to look at charts like Traders and then trade just like them or more accurately off their actions. Seems obvious when you say it like that but this may actually be the only way to achieve an edge over the long haul.

If you don’t want to spend your time thinking this through then I’m sure there’s another guy waiting to sell you the latest ‘can’t loose robot’ or ‘holy grail’ system. Putting myself in someone else’s shoes actually sounds a whole lot more straight-forward. I can’t beat them so figuring out where a Trader would enter and then doing the same means they’re doing the heavy lifting and I’m simply along for the ride 😉

Now a simple question remains…

How can you understand what Traders with a capital ‘T’ are doing? You need to look and think about what’s actually happening from the perspective of a bunch of real people that are already in the market, already in a position, trying to get in or out depending on whether the price is going up or down, rising or falling sharply. Thanks to @Trader_Dante for mainly providing the mental kicks to get this out of my brain and onto this ‘ere blog.

Traders are competing with others buying and selling actual stuff and because the retail guys is not doing this then it’s actually very challenging to look at a chart while keeping this in mind. Who is getting a kicking and who is dancing round the office? It’s that simple but until you realise you need to look at what is occurring on a chart with a completely different mind-set I’d say you may still be in the 80-90% bracket.

Ask yourself a different question when you look at a chart (price) pattern, see some news or try to get a ‘feel’ for market sentiment over the long term. Ask yourself this: –

What are the buyers/sellers and other actual Traders going to do when the price gets to ‘x’ point?

In summary and for the last time today… You are making a ‘bet’ on the price move of something that is being bought and sold so it’d probably really help to put yourselves in the shoes of those actually doing ‘buying’ and ‘selling’. How you see the price is not how the people moving the price see what’s going on so you need to look at everything from their perspective for a chance to win.

Right. I am now officially sick of thinking about trading. Possibly until tomorrow anyway 😉

I’d really be interested for people to comment on this post so please don’t be shy in coming back with your thoughts. Thanks for reading.


6 thoughts on “The real reason ‘retail’ traders fail

  1. Leigh

    This post really shows how far you have come on your journey Robert. Compare it with some of your early posts . . . A Gem! Newbies pay attention:)

  2. Simon

    A thought-provoking post so a few thoughts, Robert. I’ll say before I start I am not nailing my colours to any mast here. Just typing as I think and playing a little Devil’s advocate 😉

    I guess it really depends on your fundamental view of how one can make money from the market. I am quite satisfied that there are many technical signals / combinations and strategies that will give an edge provided they are layered on top of solid psychology. I believe the collective human (and robots programmed by humans) patterns repeat time after time in the market and money can be made from them as long as when the pattern is invalidated, you’re out. Whether that’s through needing to see the MACD at X, the RSI at Y and the Stoch at Z, or just watching price action (FTSEday style like I am learning), it matters not a great deal, as they are based on repeating patterns. For example, if one would have shorted the repeat tests and rejections of 5920ish the yearly high this past week everyone was a winner. If those double tops break and starts setting new highs, I don’t care as I’ll be stopped out. I’ll have made plenty of money from taking the pure repeated pattern over the week. I’ll wait for new highs and wait for them to be tested again.

    But thinking about it from the top down way your second diagram is the opposite of, are these repeated tests of the yearly high the chart telling us the underlying traders and their algorithms will not buy any higher? Or moving on slightly, does it show they won’t buy within the current macroeconomic context? Do I need to know the intimate details of the Greek talks (which also form patterns as they all amount to nothing!)? Or if the daily volume is going into risk or defensive sectors? As long as I avoid pre-planned news announcements, such as the NFP, then when the dust settles surely the chart will tell me what the people who actually move the market think as they won’t buy and sell any higher. Maybe that’s your point. Having a simple macro-economic appreciation, keeping an eye on the major news (NFP, CPI etc) and thinking when you put on your trade ‘is the macro-economic environment the same as the last time the market movers didn’t want to buy at this high?’

    I appreciate that’s really relating to basic double tops / bottoms at the extreme ends of daily / weekly range, but I think you could get a child to trade those patterns as long as they stick to certain rules. Again, I’m not convinced you need to even that good an analyst if you have great psychology. Not that that’s an easy feat, of course. Perhaps keeping it comically simple is the key to having the required focus and discipline. No implication here, but reading ‘Trading in the Zone’, Mark Douglas points out that people who want to get better at trading, logically, think that the best way to do so is to try and learning everything they can about the market. Granted, this was when he was when he was talking about people not purely accepting risk and wanting every trade to be a winner, but it may apply here, too. Another point from that book, he talks about being basically psychology pure when we first trade and don’t know what we’re doing, and that getting back to certain aspects of that state, after being beaten by the market, is where we need to be. I sometimes feel as if taking in too much information amounts to noise which hinders that progress. Perhaps that’s a personal battle.

    I am only speculating and articulating my observations and experiences so far. I am open to ‘everything’ at this still early stage of my trading. I am right at thinking you trade Forex Robert? Perhaps that requires a different approach to indices. I don’t know. I just know what is working for me at the moment.

    1. robertsweetman Post author

      Hi Simon – thanks for taking the time to reply and raise some excellent points!

      I believe that what I’m describing as ‘thinking from the trader’s point of view’ is something that you and Mike’s FTSE community are doing already – especially related to double tops and the 5920 level is basically ‘no-one’s buying up here ’cause the economy is in the s**t.

      In order to form this view I agree it’s useful to know some news but increasing the amount of detail isn’t going to really get you much. Depth more than likely leads to analysis paralysis 😉

      However, I wouldn’t describe you or Mike as newbies either so when you get to the point of unconscious competence then the type of thinking I’m describing is pretty much built in. The post really serves as a warning to new traders that there’s more ‘behind’ what they’re trying to do than they might first imagine.

      Having excellent psychology is absolutely necessary – regardless of how you trade. It doesn’t matter one whit if your system is excellent or mediocre cause if you’re an emotional basket case you’ll lose – simples.

      I don’t think I’m qualified to discuss the differences between trading indices and FX. I’m open to looking at Indices since I actually spend a lot of time looking at them due to the correlation between stock moves and risk on/off flows into the USD. If it works then it works – although market movers have a lot more flexibility to ‘game’ the forex market to serve their own ends. Some of these patterns are consistent and therefore trade-able if you know what you’re looking for.

      So in summary I think we agree in that ‘keeping it simple’ is the key and looking at what’s happening from the ‘trader’s point of view’ is (imho) what you guys are already doing. The message is that newbie traders don’t even recognise this approach. If there was a holy grail it would probably be ‘trade what you see’ and make sure what you’re seeing is the same as the majority of the participants – however you classify them 😉



  3. Simon

    Interesting thoughts. The key psychological battle I am fighting at the moment is the difference between knowing and feeling. I know what is the right thing to do. I have a business plan for that. I just don’t always feel it. It’s not much fun when actually in the trade at the moment. No where near how I need to feel to be the emotionally balanced and neutral trader I want to be. No problem enjoying the result of a good trade / series of trades, of course. I guess the feeling part comes with the unconscious competence. I’m hoping the more times I force myself not to take profits too early or move my stop in to where it should be the easier it will get. It’s not a lack of belief that it’s the right thing to do it’s the battle in my mind that every trader has gone through / goes through, so why does my mind resist? It’s also odd how other common trading psychological areas of weakness I have no issue with. I don’t chase trades, I never feel if the market is against me and most importantly, I always move my stop to +1 pip relatively early in the trade. Perhaps +1 gives great security when knowing I can’t lose money (except for some major slippage etc). Also, the latter examples I know and feel are the right things to do. Some I knew (after learning about them) and felt were right off-the-bat. It’s interesting how we easily cope with certain ‘common’ psychological trading defects and struggle with others. As long as you’re aware of the ones you struggle with I guess that’s half the battle to develop.
    I’m not sure if you’ve experienced this, but one threat I fear is how it will affect me when I start trading with more serious amounts of money. I am compounding my wins so am building a gradual equity curve, but at what point does it become and issue? Will I treat £25 PP like I do the £4 PP I trade? Mike advises trading with their money, which he means start with £200, make £200 and withdraw your £200. Then it’s not ‘your’ money as such. I also like your suggesting of not looking at the P&L whilst in a trade. This is something I’ll consider when eventually (hopefully) I’ve compounded to decent sized £ PP.

    Finally, I add your site has helped me since I started last summer – perhaps just trying to avoid your mistakes 😛 But seriously, the honesty can only help you and others, so thanks for that.

    1. robertsweetman Post author

      I believe that ‘neutrality in the moment’ (the best description I can come up with) simply stems from experience. How I feel emotionally when a trade is on now is entirely different from when I started this journey over a year ago. I don’t think it’s unusual that developing this emotional ‘distance’ from what’s happening on screen takes a while to establish. I certainly need more practice at it!

      Here’s something I’m doing to mitigate/manage the emotional side and it relies almost entirely on record keeping. Let’s say you enter a trade for a reason (or a number of reasons or based on one setup, whatever you call it) and you’ve recorded all these points. Now – it will go in your favour a certain amount of time and a certain distance or you’ll be stopped out.

      Now, once you’ve completed 100 trades (purely hypothetical number) you will be able to figure out not only what your win/loss ratio is for a particular event on screen but also how far you let it run as well as (looking back) how far it could have run if you’d left it alone for ‘x’ amount of time.

      On this basis, when entering a trade, you will know IN ADVANCE that setup ‘x’ usually comes good say 70% of the time and you make 1R (what you risked) so it’s a good idea to take all of these! Also, on this basis if that particular setup begins to break down because the market characteristics have changed – it will be something you notice as your win ration will start to decline…

      This is running trading as a business rather than hitting home runs.
      At the moment I’m trading to learn but also to collect data 😉

      Now I’ll come back to your point. Let’s say you decide to go from £5 per point to £10 per point. Yes, you’re trading with your winnings but no-one likes to lose money! However, since you now know that historically setup ‘x’ wins (hypothetically) 70% of the time and you use a 10pt stop with an average win of 3R (Reward = 3 x Risk) you can get comfortable in advance that you’re going to risk £100 to make £300 with a 70% chance of success. This come’s under RogueTraderette’s blog about ‘Worrying in advance’ that I really like. So that’s ten trades which on average leaves you with the following scenario – you’ll lose £300 over the course of 10 trades but make £2100 resulting in £1800 profit. Now risking £10 per pt doesn’t seem like such an ask, right?

      To trade larger you need confidence in how you trade and my ‘plan’ is to be able to SEE that my trading has improved and ‘know as far as possible what my experience ‘should’ be even when trading larger. You can’t really do this without good record keeping. Having a statistical foundation that can provide feedback should mean you’re less likely to enter dogs**t trades regardless of the size.

      My intention for this site is of course to record my learning journey for my own benefit. However I also feel that the ‘industry marketing’ aspect with regards to selling the dream of trading from a beach 30 minutes a day needs exposing as the bullshit that it is. Here’s what it actually involves boys and girls do don’t say you weren’t warned 😉

      Thanks again for the awesome comment


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