Truth of brokerage industry,Trading expert & retail traders

The truth of the brokerage industry, Trading expert & retail traders

Read this blog very carefully. This can be an eye-opener for you. It is hard to believe but the truth is the truth. In this blog, we will share the knowledge and information that retail traders never ever figure out they have no understanding of the trading and portfolio industry from the inside.

The 90/90/90 Phenomenon

1. It says 90% of the retail traders lose their 90% capital within 90 days.
2. The broker provides you the leverage  of 40x 
3. If you lose 2.5% with leverage you will blow your account by 100% in a single day.
4. What if the broker takes the opposite side of your trade
5. The broker always wins with 90% success ratio.
6. Your objective is to make money but the broker objective is to take your money
7. The infrastructure is built not for your benefit. It is built for the broker benefit

Why it is difficult to earn money in trading?

1. If you want to set up a new business you research about your competitor, you search for the winners and losers, hows the industry works, how do I succeed in this industry, what mistake do I need to avoid. If you are going to any industry as a businessman you research it but why you are not doing this research about trading. Retail trader jumps into trading without any business knowledge.
2. Technology has significantly increased the participation of retail traders
3. Volatility in the stock market is decreased after the 2009 stock market crash. What is that mean for traders? Volatility is the lifeline for the traders because without volatility you don't have any risk and any reward. Risk and reward are the two sides of the same coin. If volatility has decreased the risk and reward also get decreased also returns after a certain time period gets to zero. So why stock market volatility gets decreased?
4. Get yourself into the volatile market if you are a trader
5. Try different instruments like a commodity - stocks-options
6. There are two main reasons for the decrease in volatility in the stock market
7. Technology: Retail traders can no longer rely on day trading or scalping technique in the hope of making quick and easy money. Algo trading has taken over and always beat the human over a short time horizon.
8. Participation: More participation = more liquidity = less volatility =less opportunity to make money
9. Due to these two reasons, day traders lose money because they enter into a less volatile market. If the market is not volatile how can you make money 
10. Because the market is not the volatile market is in the same position after one year and dedicating the brokerage for buying and selling you are actually losing money.

The behavior of  professional traders / Hedge funds trade vs Retails investors or individuals

Professional traders / Hedge funds

1. The approach of  Professional traders / Hedge funds: They are systematic and consist of both long and short stocks in their portfolio for the 1-3 month time period. Their trades are 80% based upon fundamental and 20% based upon technical.
2. Risk of  Professional traders / Hedge funds: They have diversified portfolio long and short positions. They trade with correlation stock. If their one decision went wrong it will not blow their entire portfolio. Their position size is 5-10% per stock. The expected return is 15% and risk is 5 %.
3. Return of  Professional traders / Hedge funds: They are in the market till the retirement. They expect the returns of  15% and the risk of 5 %. They are hired to beat the index return.
4. The outcome of Professional traders / Hedge funds:: Their main outcome is to preserve the capital and consistent growth over the period of time.

Retails investors or individuals

1. The approach of Retails investors or individuals: Short time frame ranges from 1 day -4hr-1hr-5min. Looking to make quick money so if you are looking for quick money you can lose money quickly. 
2. Risk of  Retails investors or individuals: Most of the retail traders have 2-3 positions. They are mostly one side of the market either in long or short. If the market turns against them their account get down by 50 %.
3. Return of Retails investors or individuals: Retail traders take the risk of 50% over the return of 25%.They trade is based up the news and when the news comes they exit their positions with small profits or exits with 50% loss if the news turns against them.
4. The outcome of Retails investors or individuals:: The outcomes of the retail trader is capital destruction and end up with zero in the account within 90 days.

Brocker vs Retail investors

1. Let say a broker has 10,000 retail clients and out of this 90 % lose all their money within 3-4 month how the broker can grow. With administration cost and advertisement cost, the broker will never grow and earn a profit. How can he earn money? A broker can make profit if he filters 10 % of traders and trade against the other 90%  Broker winning percentage will be 100%. There is always a conflict of interest if you are doing trading short term.

How the broker earn money?

1. Brocker Revenue =(Spread+commission)+(financing+OTC gain)
2. Brocker Spread and commissions increases when a client trade regularly and take bigger size trade.
3. OTC is called over the counter: made by taking the opposite position of retail traders
4. Financing: Money made from the % difference borrowing from a creditor like a bank or investors to finance leveraged trading  and % charged to the client
5. Therefore the broker always wants you to trade as big as possible to earn the commission and take the opposite trade against you.
6. Investment bank provides credit line at low cost to the broker 
7. Broker provide leverage to the retail traders at a higher cost than an investment bank
8. The difference is  the profit for an investment bank
9. The risk-taker is an investment bank for leverage, not the broker
10. When you deposit money in your trading account 
11. You are sponsoring your broker to borrow more money
12. Therefore by depositing money in your trading account you are not only sponsoring the financial turn, but you are also sponsoring the broker to have the option to use the same credit to make money by taking the other side of your trades if you lose.

Why Brocker provides 40x leverage on your trading account?

1. What it takes to open a trading account?
2. ID card-address proof-Bank account
3. When you add 1,00,000 in your trading account why broker allows you to trade with 40x money? Can banks lend you the same amount of money if you take a loan?
4. The bank never provides you the 40x money but the broker does.
5. Because the broker has 90% winning trades. They promote you to use leverage and take big trade as much as possible.

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