5 Reasons Retail Traders Lose Money

5 Reasons Retail Traders Lose Money

5 Reasons Retail Traders Lose Money was written for Playlouder by a Cristina Par. Please note that contributing opinions are that of the author. They are not always in strict alignment with our own opinions.

Retail Trading, and its more sinister cousin, day trading, has witnessed an explosion in recent years, with millions trying their luck in the “lucrative world” of trading equities, currencies, derivatives, and more. 

Retail Traders
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However, as much as 80% of them will end up losing money and quitting within two years, according to data compiled by Tradeciety.com.

Trading is a tough business, and it is particularly difficult for retail traders, otherwise known as “the average person,” who often enter the markets with limited capital and experience, to begin with. 

In addition to this, there are many other mistakes that retail traders make, which we will review in this article.

Lack of Education and Research

Retail traders often enter the markets without sufficient research and education. They may rely on tips from friends or follow rumors without understanding the underlying fundamentals or technical analysis of the securities they are trading. 

Traders need to educate themselves in great depth about the financial markets, various trading strategies, and analysis techniques. They should also understand how relevant news and economic events that can impact the markets. 

Continuous learning and staying informed are essential for long-term success in trading. If you are just getting started, however, consider spending hours doing paper-trading, to get a feel for the markets.

Lack of Proper Risk Management

One of the retail traders' most significant mistakes is not implementing proper risk management strategies. Risk management is crucial in trading, as it helps to protect your capital and minimize potential losses. 

Retail traders today have plenty of avenues to manage risks effectively, starting with the stop-loss orders that automatically close a position when it hits a certain level—followed by a slew of diversification, hedging, and derivatives-related strategies to turn the risk-reward ratios in their favor.

Emotional Decision-Making

The fear of missing out (FOMO) or losing out (FOLO) can drive traders to make impulsive decisions based on emotions rather than sound analysis. This can lead to entering trades at the wrong time or exiting prematurely. 

To avoid emotional decision-making, traders should develop a plan that includes predefined entry and exit points based on objective criteria. By following a well-thought-out plan, traders can reduce the influence of emotions on their decision-making process.

Chasing Trends & Neglecting Fundamentals

Many retail traders fall into the trap of chasing trends and neglecting fundamental analysis. They may buy into security simply because It has been trending upward or selling short because it has declined. 

However, markets can be unpredictable, and trends can reverse quickly, and complementing technical analysis with fundamental analysis is crucial to make informed trading decisions. For example, no matter what technicals and patterns might imply, the intrinsic value of AAPL stock is what ultimately determines its mid to long-term trajectory.

Traders should understand the financial health of the stocks they are trading, analyze their earnings reports, evaluate industry trends, and consider broader market conditions. By considering technical and fundamental factors, traders can make more informed decisions and avoid unthinkingly chasing trends.


Overtrading is a common mistake when traders execute too many trades, often based on impulsive decisions or an addiction to the excitement of trading. 

Overtrading can lead to increased transaction costs and decreased profitability. It is important to focus on quality over quantity and only trade when there is a high probability of success. 

Traders should identify their optimal trading frequency and stick to it, avoiding the temptation to trade excessively. This requires discipline, planning, and self-awareness. Here are some practical strategies to help you avoid the temptation of overtrading:

  • Set Clear Trading Goals: Define your trading goals and objectives. Determine your goal with your trading activities, such as consistent profitability or long-term wealth accumulation. Having clear goals will help you stay focused and avoid unnecessary trades.
  • Develop A Trading Plan: Create a well-defined trading plan that outlines your trading strategy, including entry and exit criteria, risk management guidelines, and a predetermined trading frequency. Stick to your plan and avoid deviating from it based on impulsive decisions or market noise.
  • Identify Quality Setups: Instead of chasing every trading opportunity, focus on identifying high-quality trade setups that align with your trading strategy and have a favorable risk-reward ratio. Use technical analysis, chart patterns, and fundamental analysis to identify setups that are more likely to succeed.

Wrapping Up

It’s a mistake to think of trading as a pathway to easy money. If anything, it’s one of the toughest ways to make any money at all. More often than not, retail traders end up losing all their capital within a matter of weeks or months.

The best way to understand trading is to educate yourself well and then spend a significant amount of time paper trading. Don’t start risking real money until your paper trading strategy proves worthy.