The growth of online trading platforms over the past 50 years has opened the doors to countless retail traders, giving them access to opportunities in financial markets once reserved strictly for institutional investors. But access alone is not nearly enough to guarantee success.
Institutional trading is driven by data. Consequently, retail traders who want to take advantage of the opportunities they’ve gained through broader market access must also develop data-driven strategies. And in today’s trading landscape, the strategies that lead to success are increasingly complex.
Developing strategies that incorporate the right data and apply the right algorithms is the primary challenge faced by today’s retail traders. To keep pace with institutional investors, retail traders must be able to access and analyze the data relevant to financial markets with the speed and accuracy needed to engage effectively with market trends.
The Pathway to Democratization
While online trading platforms got their start decades ago, the engagement that led to meteoric growth began during the COVID-19 pandemic. As the business world paused, retail traders had more time to engage in financial markets. And thanks to stimulus checks, they had more money for trading.
As traders dove into markets, they had access to platforms that allowed them to engage with little to no fees from anywhere and at any time and the platforms were easy to access. With Robinhood, for example, traders could open an account in five minutes and begin trading with a low capital requirement.
The growth of the retail trading community during the pandemic also led to online communities designed to serve retail traders’ needs. Through YouTube and other social networks, the communities gave traders access to virtually unlimited educational content and support, some of which was delivered in real-time as notable market shifts were happening.
All those factors meshed to democratize trading and spur trading and options volumes to rise to all-time highs. That being said, the new levels of accessibility also triggered issues that made it harder for retail traders to compete effectively.
The Downside of Democratization
As new avenues opened for retail trading, the trading industry gained access to powerful new trading tools. Thanks, in large part, to the advances in artificial intelligence, traders at all levels now have access to high-frequency algorithms and institutional-grade strategies.
However, the fact that more traders had access to advanced tools meant their general value declined overall. With more market participants using technical tools, order flow, and quantitative models, those resources provided less advantage. The tools pointed traders to many of the same indicators and strategies, which meant those strategies did not lead to excess returns in the long run.
The Temptation to Adopt Novel Strategies
When strategies become ineffective because they are being overused, retail traders can feel pressured to keep up or find consistency by adopting more sophisticated strategies, such as algorithmic trading, statistical arbitrage, or volume profile analysis. Pushing in that direction, however, can cause traders to cross the line into levels of complexity that typically lead to losses.
As losses pile up, traders can panic and revert to following emotions or biases not in tune with the state of financial markets. They can also be tempted to act without having all of the data they need or a proper analysis of that data.
The Dangers of Turning to Influencers for Insights
The boom in retail trading prompted an increase in influencers who offered their insights via posts and podcasts across the social media landscape. These “experts” offered strategies on everything from swing trading to delta hedging to algorithmic trading. The challenge for retail traders seeking to improve their effectiveness was figuring out who they could trust.
Separating the good advice from the questionable advice requires a high level of due diligence. Some influencers seek to build audiences by presenting screenshots of their profits, which can be misleading at best and fabricated at worst. Before trusting anyone with their education or capital, retail traders should find out who the person is, how long they’ve been trading, and what kind of real-world experience they bring.
Retail traders also need to resist the urge to turn to influencers in hopes of finding tricks for earning quick profits. Traders gain the most from influencers when they follow to learn and not to copy. Trading is a skill developed through investing time in learning, testing, understanding data, and making mistakes.
The new technology available to retail traders in recent years has democratized access, but it has also raised the bar regarding what it takes to compete effectively. Today’s traders must not only understand price but also the data, tools, and structure behind it. Only by committing to continual learning will they be able to adapt and develop effective strategies as markets evolve.
