Transaction Survey: Why Are Retail Traders Confused?

In today's market, many high-quality retail brokers have gathered large capital bases with fully proprietary trading systems, which are publicly listed on exchanges, and can provide their global clients with access to thousands of derivatives and over-the-counter assets at very low cost. It can be said that the accessibility of diversified foreign exchange markets has never been stronger, bringing unprecedented convenience to retail foreign exchange traders.

Over the past decade, the retail electronic trading department at the top of the transaction has created a mature trading atmosphere, allowing retail traders to have a trading environment almost equivalent to the one enjoyed by professional and institutional traders in Tokyo, New York and London.

Behind these technologies and market access is the main force of main brokers who allocate liquidity of tier-1 banks by directly establishing relationships with the largest interbank foreign exchange service desk in the world. Such a scenario has directly led to more and more retail traders starting to behave the same as professional and institutional traders.

Apparently, some of the retail traders are very savvy who understand and create their own mathematical algorithms to measure historical data, or use machine learning techniques to aggregate market sentiment data, and then plan ahead. In some cases, they can predict the future behavior of market and traders so as to make strategies accordingly. However, such clever traders account for only 10% of global traders at best, most of which come from financial developed countries such as the United States, Britain, and Japan.

Industry leaders choose carefully for retail traders.

Interactive Brokers, one of the largest capital-based retail forex brokers in North America, has already shifted its focus to eligible contract participant (ECP) business. One of the reasons is that the standard of company's customers is so high that Interactive Brokers can stipulate that its core business should be worry-free and stable ECP customers, and therefore raised the minimum deposit of its global retail traders to $ 10,000.

The company continuously build professional tools for traders, focusing primarily on analysis and data, which is in line with the company's spirit of taking care of ECP business. ECP refers to groups or individuals who are allowed to engage in financial transactions that are not open to retail customers.

In the United States, the Commodity Exchange Act outlines eligibility requirements and states that individuals seeking to become ECP must have sufficient regulated status or a specified amount of assets. ECPs are usually companies, partnerships, sole proprietorships, organizations, trusts, or other entities with total assets in excess of $ 10 million. Coupled with high net worth retail customers, this means they need to be equipped with high quality proprietary tools that work with the company's platform.

MT₄ is widely applied among average retail traders.

Business decisions like this indicate that some large companies realize that about 80% of retail traders do not use any form of data analysis, but only trade on third-party platforms (usually MetaTrader 4) on a fully speculative basis. Small brokers have also been aware of this, so they will pay more attention to customer conversions instead of investment in trading tools.

The popularity of MetaTrader has enabled nearly 85% of brokers worldwide to make MetaQuotes and potential switching and traffic purchases a priority for their clients, rather than focusing too much on interacting with experienced traders or running their businesses as a fintech-driven service company.

This leads to another phenomenon, in which analysis traders are concentrated in a few companies, while others are regarded as potential customers and conversion channels instead of traders.

How many retail customers are using back-test?

Back-test is one of trading strategy analysis skills grasped by minority of traders.

In the past, back-test was only performed only by large institutions and professional funds manger due to the cost of acquiring and usage of detailed data sets. However, back-test transactions are becoming more and more widely used, and independent web-based back-test platforms have emerged. Although widely used, it is prone to defects. Basel's financial regulations require large financial institutions to apply back-test to certain risk models, so all institutions and professional traders are very familiar with back-test, while most retail traders forget this "weapon".

When it comes to trading strategies, investment strategies or risk models, back-test aims at evaluating the use of a strategy or model over the past period of time. This requires stimulating the past conditions in sufficient detail, which limits back-test of detailed historical data. The second limitation is the inability to simulate strategies that affected historical prices. Just like other models, back-test is limited by potential overfitting. That is to say, it's often possible to find a strategy that worked well in the past, but will not fit in the future. Despite these limitations, back-test still provides information which re not available when testing models and strategies on synthetic data.

Now there are many analysis corporations provide retail traders with tools for back-test, while lots of small retail brokers still ignore this and choose to continue providing the same MetaTrader platform as more than 1,000 other brokers, adhering to the same sales techniques and focusing on conversions and CPA conversions.

Overseas analysis agencies have discussed this with some retail traders. A trader using back-test said, "I want to use Python to process data and run statistical tests, then download it for back-test and Real-time trading. So far I have been using Interactive Brokers as it is one of the platforms that supports such strategies. "

Since the early days of retail forex trading, many independent back-test systems have been available, and independent systems such as Forex Tester have undergone several iterative upgrades. The design of MetaTrader4 also has its own back-test system. Unfortunately, according to research, there are very few domestic users who really use such advanced strategies as back-test. Whether technical requirements, broker support, or cost, this has limited this. The widely use of such advanced strategies in retail are limited by technical requirements, brokerage support, cost, etc.

But in any case, we should encourage more retail investors to gravitate towards professional institutional investors. After all, to have the same trading tools, strategies, and data support as them can greatly improve win rate of trading.