The Financial Market can be liked to be a ponds, where there are many fishes: some big, some medium in size and the others small. When we try to classify these people who participate in the day to day trading activities in the Financial Market. We always mention the Retail Traders and the Institutional Traders whenever we talk about the Financial Market – As these are the two known players in the Financial Market.
In the Financial Market, you must have heard the saying that “Retail Traders make about 5 % of the volume traded on the Financial Floor” while this may hold a bit of truth in it, we should not neglect the fact that there are lot of Retail Traders and those numbers will keep on growing, these Retail Traders are a part that make the Market become liquid as Institutional Traders always hunt these stops off the Market.
In this article, we are going to explain and look at who the retail traders are and their impact on the Financial Market.
Who Are Retail Traders?
Retail traders are small scale traders or investors, who trade or invest small volume normally 1-10 lot (contract size) per trade. These traders do not have millions of dollar to trade either do they trade on behalf of a cooperation or individuals. We can say that retail traders are you and me, along with thousands out there.
We can also term Retail Traders as those with little trading balance, normally we do see people who trade forex with just a couple hundred dollars to thousands of dollars.
Over the years, Retail Traders have been increasing in numbers – all thanks to the ever growing technology and data feeds which can be easily be shared and accessed across the globe. Unlike in the late 90’s where the only way to trade was on the Exchange Floor and even if you manage to get a broker on the Exchange Floor, you would need to deposit tens of thousands of dollars as minimum deposit, execution and placement of Market orders could takes minutes to hours and the requirements were so hectic that only a few could meet the requirement.
How do Retail Traders Trade?
Nowadays anybody can have access to any device (mobile or computer) with a good internet access. With the following at hand (device and internet access); that’s like one of the criteria in opening an account with a brokerage firm.
Depending on the jurisdiction and regulatory body regulating the broker. A proof of residence and an Identity card anybody from anywhere can open an account with a broker – as far as you are 18 years and above.
The internet has made things a lot easier, that data can be exchanged so quickly and easily that no one needs to be in an exchange floor or even know what is happening on the floor before a trade can be executed as there are lots of automated systems that anyone can use.
Online platform such as MT4/MT5 has made it so easy that anybody can easily get news feed on any particular Financial Instruments, along with some tools that will make trading easy such as indicators, trading Expert Advisors or Robots and different order execution types, stop loss and take profit etc.
But with these features that has made forex trading easy, Retail Traders are still lagging when compared to the institutional Traders.
ALSO READ: How To Survive In The Forex Business Part I.
Before I proceed lets discuss a bit about the Institutional Traders.
Who are the Institutional Traders.
Unlike the Retail Traders who are individuals that trade for themselves, the Institutional Traders are Institutions, Entities and organizations such as Mutual funds, Pension Funds, Hedge funds, banks, financial organization and other cooperation – who trade for various wealthy clients.
What these people do is to either make profit from speculation just like the Retail Traders does or take delivery of the Financial instruments, assets or commodity for example, a bank might buy a Financial instruments let’s say Treasury Bills or Bonds on behave on their customers from the Central or Federal Bank, which he will give delivery to their customers.
With these information let’s try to compare both traders
Comparing Retail Traders to Institutional Traders
The Retail Trades trade for just himself while the Instructional Traders trade not just for themselves both for hundreds if not thousands of people with their funds pooled together, to create a single capital base. That’s why when it comes to volume in the Financial Market, the institution trade volume will always beat the retail trader’s own.
Individual retail traders might be able to trade an average of 5 lot (contract size) in the Market per day, the Institutional Trader might be able to trade 900-1000 lot in just one day – all thanks to their capital strength.
With the following examples, we have seen that the institution have a lot of powerful tool at their disposal to try and move or manipulate the Market with their volume.
Let’s see some disadvantages Associated with the retail traders
Disadvantages Retail Traders Passes Though
Institutional Traders are able to move the Market to some certain levels or directions by wiping or swallowing smaller orders size in the market unlike Retail Traders that controls a tiny fraction of the volume in the Market. Institutional Traders are always ahead.
When it comes to getting good price feed, brokers might cheat retail traders by giving them a wide spread rate and a price with latency of milliseconds that is the difference between the buy and the sell price (ask and bid price).
While institutional Traders might be ready to buy without spread or even with minimal spread, they are able to get into the Market and exit almost immediately, thanks to their interconnected network.
So in summary, we have seen that the Financial Market is looking lucrative to both participants, but it is not always treating both participants equally.
As the institutional traders are always ahead thanks to the technology, capital and interconnected network and others.
The retail trader might feel cheated but can be have an edge, if there are patience and consistency in this trading plan and risk/money managements. If one look at the Financial Market they can see the movement of price in other word the pattern; that’s both institutional and retail traders making various buy and sell trade. Retail traders can easily see areas of demand and supply along with areas of liquidity, resistance, support and pivotal point.
Understanding these areas can give the retail trader an edge and they do not need to worry about what the institutional traders are doing or will do as the institutional trader will always move the price to their desired and pre-defined direction – that how they make there billion dollar profits which they declare every year.
Remember that the Financial Market do contain a lot of risks as well as loss and profits, with the right tools and a good risk and money management one can survive in the Market long enough to make consistent profit.