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This post contains information that I wish I had understood when I first became interested in trading. If it saves even one reader from losing tons of money then it was worth writing.

Have you ever stopped to wonder why there are broker ads everywhere trying to get you to open an account and start trading?

"The markets are hot right now! Don't miss out!"

"Trading is easy!"

"Open an account today and start trading crypto/forex in minutes!"

Some brokers might even give you a deposit bonus for opening an account as an additional lure. The reason why brokers are so desperate to attract new customers is because the majority of retail traders lose money and end up blowing up their account or quitting, so there is a never-ending need to find new replacements.

You can see this for yourself by going to the website of any regulated broker offering CFD (Contracts-for-Differences) trading. There is usually a disclaimer somewhere on the front page detailing the percentage of their retail clients that lose money trading CFDs. I made a quick list of some random brokers below:

% of retail traders that lose money trading CFDs (correct as of 25th August 2020)

AvaTrade: 79%

Dukascopy Europe: 76.91%

Etoro: 75%

Forex.com: 73%

FXCM: 75.38%

FXPro: 80.59%

FXTM: 74%

IG Markets: 76%

Oanda: 73.5%

Pepperstone: 78.6%

Plus500: 76.4%

Saxo Bank: 71%

XM: 75.55%

You can see that the percentages are remarkably consistent - roughly 75% of retail traders lose money trading CFDs. This is a direct contradiction to ads that try to suggest that trading is easy and is suitable for everyone! The numbers don't lie, trading is difficult and the odds are stacked against retail traders.

Let's take a simplified view of the market participants to understand why. If we imagine that the market is an ocean, then the whales are the institutions like the investment banks. They trade huge positions that move the market and will crush anyone that gets in their way. If we look specifically at the currency markets, here are the top 10 players by volume according to the Euromoney FX survey 2020:

The top 10 players in the currency markets account for 63.66% of the total volume.

Continuing on with our nautical analogy, the sharks are the experienced investors and traders that follow the whales and know how to profit from the market. So where does that leave the average retail trader? They are tiny herring trying not to end up as shark bait. Every trade needs buyers and sellers at an agreed price in order for a transaction to take place, so the whales (smart money) need people (dumb money) to take the opposite side of their trades. The main function of retail traders in the markets is to provide liquidity for the professionals; to be shark bait and whale food - the dumb money. So you can see that the whales have a vested interest in maintaining the status quo, making sure the general public are misled about trading, so that they can continue to use new traders as a fresh source of liquidity for their profitable trades.

Where do the brokers fit into this picture? They are like wave power farms that generate electricity ($$$) continuously for as long as the ocean (market) exists. Most brokers make money by charging traders a commission or spread for each trade they make. This means they make money if traders trade more frequently or trade with bigger positions. So what does a typical broker do? They offer free "education" on short-term day trading strategies and allow you to margin trade up to 100 times your deposited money! Where do brokers get all the money to allow you margin trade with money you don't actually have? Why from the investment banks - the same investment banks who don't want retail traders to succeed at trading. Are you starting to see the big picture yet?

But it gets worse! A broker will typically split its clients into 2 categories: an "A"-book of profitable traders (the top 25%) and a "B"-book of losing traders (everyone else). There is nothing stopping a shady broker from actually trading against a typically retail trader in the "B"-book, knowing that they will lose over time and also copying the trades of "A"-book traders - this creates an additional revenue stream for them. Always be skeptical about any education or services offered by your broker and make sure to do your own research!

Main Takeaways

Markets are dominated by institutional traders (whales). They need dumb money to take the opposite sides of their trades, so have a vested interest in misleading the public.
Brokers make money off commission/spread so have a vested interest in making you trade as often as possible with big position sizes.
The majority of retail traders (roughly 75%) fail. Trading is not easy.
Retail traders are set up to fail with broker miseducation and advertising. Take your time, don't rush into anything and do the opposite of what the average retail trader does!

So, do you still want to trade?

Posted Using [LeoFinance](https://leofinance.io/@upanddown/what-every-retail-trader-needs-to-know-about-trading-and-the-market-participants)