For many people financial trading is a dream about making big money and giving up on work. But what is the reality for a retail trader? We conducted a poll for some very interesting results!
Trader’s expectations do not match reality in terms of expected profit and capital required to make a living off trading. Over 40% of traders expected a monthly return of 50%+ when <10% is likely. 30% of traders intended to start with $500 or less in capital which would yield less than $50 a month.
Our poll was conducted to an audience of retail (non-professional) traders. We asked a number of questions to understand what their hopes and expectations are for trading and trading education.
The results gave a really interesting insight into the mismatch between what most people can achieve and what people are hoping to achieve. In fact about 73%* traders lose money. Source (Justin Grossbard, UK Broker List).
But this data also gave us some potential insight into why so many people do fail in trading and some interesting misconceptions about the markets itself. By looking at these results, we can hopefully all become better and more successful traders!
Overview Of Participants
Before going through the results, here is some information about the participants:
A mixture of trading experience and goals:
There was a good mixture of trading experience. 25% had less than a year’s experience, 30% had one to two years experience and 45% of participants had more than two year’s experience.
Around 60% of respondents were looking for additional income and 40% wanted to become full time traders.
Many people ARE putting in the work:
Trading isn’t easy! Like any new skill you want to learn, it takes time and effort to master. Many articles say that people think trading is easy. This is not my experience given how many people I see talking about their struggles.
It is clear that people are putting the time in, about 37% were dedicating between 10 and 40 hours a week of which 16% were spending 20 to 40 hours a week on trading or trading education.
This is where the data starts to get interesting and points to some of the real issues. It may not be a lack of effort, but effort in the wrong direction or without discipline in application.
Jumping In Feet First (and blind)
One of the first mistakes that traders make is that they can skip the step that every trading educator tells them to do – trade a demo account first. Only 5% of the traders were trading a demo account exclusively.
It can easily take a year of trading on a demo account to create a trading plan and strategy that produces consistent results. As 25% of respondents had been trading for less than a year, we would expect to see more people exclusively trading demo accounts.
This is one of the most striking results of the survey. Too many people believe they can trade without a strategy based on gut feeling or instinct alone or with a basic strategy they have read up on or watched a video about.
Trading is all about consistency. Consistent effort = consistent results (aka profits). It requires the discipline of a full range of tools in order to do so. These include:
- Trading Plan: an overall plan for managing your trading activities
- Trading Strategy: a specific set of rules for entering and exiting trades
- Risk Management Plan: how much you risk each trade and how you limit your risk with stops or hedging
- Excellent Record Keeping: a trading diary or equivalent
- A Fully Backtested Strategy: validation that your strategy actually works
Let’s look at the results:
Almost 60% of the traders survey had NONE of these in place.
Backtesting is crucial
It is not surprising that so few traders had a backtested strategy.
Backtesting is a long and laborious process which starts with a trading hypothesis (a potential strategy) that then needs to be sense checked in the market to create a firm set of rules which is then fully backtested.
In many cases, trading educators show an electronically backtested strategy and people just rely on their word that it is correct. Unfortunately, the reality is that it is very hard to programmatically test a strategy in the real market as you need to take account of multiple factors such as the specific trading hours of the market you are trading, time zone changes, the effect of news events and holidays, etc.
And all that is even before you look at market structure implications (i.e. what confirmations or major support and resistance levels would cause you to abandon a trade as low probability.
The truth is that it takes looking at and recording 1000s of trades to validate a strategy fully.
Traders Understand What Their Problem Is
The next set of results were actually quite revealing in that it showed that most people know that they lack discipline, 57% admitted to not having the patience to wait for trades and over 60% had fears over losing money or their trading psychology.
If you never had a plan in the first place, then you were never going to have the discipline to wait for good trades. That, combined with inevitable losses, will lead to a lot of anxiety over losing money and put you in a negative spiral.
It’s Not About A Lack Of Education But Of Trust
Another interesting result is that very few people had issues with a lack of available education or its quality (less than 10% for each of these questions).
There was however a sizable proportion of people, around 35%, who had a lack of trust in trading educators.
There is so much information out there that it can be overwhelming but the reality is that most of what you need to know is freely available.
One of the biggest issues is that despite hearing over and over again that fast returns are not easy or realistic, many people will end up buying education from those promising overnight success.
We all know something that looks too good to be true and trading education is not different, sadly people can spend way too much on education with poor returns on their investment.
It is not just courses that people are spending their money on. A range of trading services were bought. The top three non course spends were Signal and Copy Services at 54%, Trading Rooms at 43% and Indicators at 35%.
There are many ways to spend money in trading and one of the most tempting are signal services. Many promise 90%+ success rates which is absolutely not possible!
Expectations Of Returns
This is one the most interesting parts of the survey because it is all about the bottom line. How much can you make from trading? And How much money do you need to start trading?
Can You Beat The Professionals?
We asked the respondents what they were expecting to achieve as a return as a % on a monthly basis. We also asked what they expected professionals to make as a monthly return.
The results were very insightful. Just under 25% of people expected to make up to 15% return a month. At this range the expectations was that professionals would outperform with more responses favouring them at the 7-15% end of the range.
At the higher end of the range over 40% of people had expectations of a greater than 50% return which even beat their expectations of what a professional could achieve!
This is a huge reality check for traders. There are many educators and sites out there that claim multiple 100% returns on trades. This may be true for a few trades here and there but ultimately the measure of success is the P&L month over month over month.
This means all wins vs all loses. When this is taken into account most traders will achieve sub 10% returns on a consistent basis.
Traders do chase a higher return than investors but for a sobering reality check, the world’s most successful ever investor, Warren Buffet, achieved roughly a 20% average annual return over the 35 years from 1985.
This highlights two important fundamentals that most traders miss:
- Risk management is the highest priority. Buffett’s greatest success is that he had very few losing years. You can improve your overall returns multiple times by just limiting your losses.
- It takes time to compound capital
Capital is important
This brings us onto capital, the traders account. Looking at the survey results showed that about 30% were looking to start with just $500 and only 5% were looking to invest more than $5000.
If we go back to the reality of sub 10% returns then on a $500 account you are looking at earning $50 a month trading. This is surely not what most traders expectations are.
Compounding is the 8th wonder of the world. However, what should be encouraging to traders is that you can build up a trading account over time if you give yourself the opportunity to do so.
If you are looking to make decent money from trading then like any financial independence strategy you are going to need to maintain another income stream while you build your personal trading business and preferably put regular money into your account each month.
To Many People, Forex Is Trading
When asked what search phrases people used when looking for trading education, over 40% used some version of Forex or FX in the search. 12% searched for Forex (FX) robot.
Trading is not just about the Forex markets and major indices such as the S&P, DOW, FTSE and DAX can actually be a better choice for beginners as they have set trading hours that can allow the beginner to better plan trading strategies.
They also have a set list of constituents which allows the trader to research news events that may move the markets or preferably sit out and avoid.
MT4 Is Still Popular
MT4 is still a popular trading platform. This validates research we conducted on Google Trends. Despite the creator of MT4, Metaquotes, pushing MT5 hard for many years as a replacement for it continues to be the most popular with traders.
MT4 is not dead yet and won’t be for a while. And why not, it is free, simple to use and very customizable.
Crypto Is An Emerging Trend
10% of respondents were using pure crypto only platforms and 15% of respondents used crypto related terms in their search queries.
Crypto trading is fast becoming a viable option but many exchanges and brokers are still unregulated so you must take extra precautions with your money.