What Do Retail FX Traders Really Want?

What returns are retail FX traders expecting

According to research done by Citigroup in January 2014, 84% of retail FX traders believe they can achieve positive monthly returns. When it comes to the magnitude of those returns, 41% of traders believe they can make more than 10% per month resulting in a staggering yearly compounded result of 314% return on investment (ROI).

Despite the high expectations, by comparison, retail FX traders expect to underperform outright gamblers who, on average, expect to double or triple their capital each time they visit a casino.

Citigroup research also indicates that 50% of all traders revel in volatility while believing the FX market to be liquid enough to provide multiple trading opportunities.

In practical terms, traders are not only confident they can identify valid opportunities, but they are so sure of their capabilities that are prepared to borrow money (leverage) in order to trade in larger volumes and thereby generate even larger returns over time.

On many occasions, they are willing to trust expert advisors otherwise known as “automated strategies” or “signals”, based on technical analysis and invest their capital, possibly since retail traders believe that future events are based on past outcomes.

The persona of a trader

People who trade FX want to feel like (and be seen as) Wall Street traders – regarded as risk-takers, high achievers, go-getters, and more broadly, as successful people. 

They want to answer the straightforward question: “Do you really want to be a trader?” by a simple and bold “Hell Yeah!”. Such people tend to be so bold that they envisage themselves sharing traits with fictional characters such as Eddie Morra (played by Bradley Cooper) in the 2011 box-office hit Limitless or Gordon Gekko (played by Michael Douglas) in the movie Wall Street.

The full of life bon viveur who wears jeans and a leather jacket, a cool maverick who drives fast cars and galivants on exotic vacations via private jet. That YOLO approach that you can make “easy money” by trading anytime anywhere is what attracts novice traders to trading, and specifically FX, given its extended hours and brokers offering mobile trading platforms.

Millennials are by far the most significant demographic in trading given that 43.5% of all traders are between the ages of 25 to 34, according to research conducted by Broker Notes in 2017.

Conceptualizing the above and validating these points through several discussions with professors that have extensive experience in the field of retail trading, I can conclude that humans trade FX because of a handful of reasons.  

Their motivation is focused on short-term profits with the ultimate intention of spending their winnings on frivolous pursuits, including vacations and rapidly depreciating cars. Spending habits do of course vary from person to person, but the underlying theme is that materialism and the pursuit of luxuries are primary motivations for new traders.

This conclusion was validated by extensive market research done by casinos in recent years, attempting to find way better ways to lure gamblers to their venues and retain their business for as long as possible.

Casinos have discovered that by promoting a particular lifestyle in addition to offering specific technical tools, it is possible to lure gamblers into betting more, and more often. The lifestyle that seems to work best (for casinos at least) is the image of living on the edge, akin to a “flambeur”, or big spender, as the French would say.

Rather strangely, retail traders want to be compared with casino winners. According to anecdotal evidence, retail traders believe that casino winnings are attributable to luck whereas successful trading is attributed to skill – therefore, there is an inherent expectation that trading talent should be respected and celebrated by others, similar to professional athletes.

Choosing an FX broker

Since my early days working on a dealing desk at one of the world’s largest FX brokers, I despised the word “retail” and all the associations that came with it – a synonym for noise, ignorance, ineffectiveness and someone who just trades to lose.

As a result of the negative connotations, most traders shy away from the retail moniker, although they enjoy thinking of themselves as sophisticated people that operate with top-tier tools in a professional way.

From my talks with a renowned professor at the University of Cambridge, retail traders and institutional traders are two distinct categories and should not be conflated into one.

A word of advice to firms offering trading services, although as a company you can provide services to both, you will need different domain names, websites, products and different marketing strategies to maximise the returns from these two distinct cohorts. 

Branding has always been a key consideration for brokers. When it comes to broker brands, influencing, regulation and safety are the three pillars of success, so there is no need for more unique selling points.

Regulatory approval in Europe, a prominent social media influencer able to influence potential clients and safety of funds – that’s the simple model being followed by swathes of brokers trying to win new business in the FX retail broking space.

The right platform and products for retail traders

It is important for trading apps to remind clients when they’ve succeeded and to demonstrate that other clients are also successful – this creates a powerful psychological effect through validation, even though the majority (around 70%) of traders lose their entire deposit within 6 months.

From a psychological perspective, the way retail traders perceive their chances of winning and how the market operates is rather interesting. Even in cases where retail traders understand the statistical likelihood of their failure, there often remains a strong belief that their ability to control their emotions and remain disciplined (unlike the 70%) is sufficient to overcome the odds.

This behavioral anomaly leads to a disposition effect given that people dislike losing significantly more than they enjoy winning. As the renowned German philosopher Arthur Schopenhauer once said,

“Pleasure is never as pleasant as we expected it to be and pain is always more painful.”

From a broker’s perspective, it is advantageous to encourage people to commit to larger initial deposits since they are correlated to longer-dated client activity.

Moreover, and in terms of practical logistics, the platform GUI should include appropriate calls to action and allow clients to be onboarded in a frictionless way in terms of KYC, deposit ability, crypto custody and promoting active trading opportunities.

From a trader’s perspective, the best trading opportunities are most plentiful when markets are volatile. In such cases, brokers have a clear incentive to encourage traders to invest their funds into applicable trading instruments, strategies, or simply, follow other successful traders with the added impetus of brokers promoting the fear of losing out (FOMO) – a tactic that is rapidly becoming the go-to strategy to push up trading volume.

An example of this would be Revolut’s move to enable crypto notifications when cryptocurrency valuations suddenly move up or down.

The trading app needs to be simple but also allow for gradual learning over time. Simple but complex. Good software should not need instruction manuals, it should allow for intuitive self-learning at a pace chosen by the user. However, the app must include the myriad of complex features that even novice traders demand right from the get-go.

Here I can touch on the gamification of a trader from junior, to advanced, to expert, or, alternatively, to suggest VIP services for larger deposit clients that enable 24/7 support, more perks and access to professional tools. Such steps satisfy clients’ expectations and help to fulfill their dream of emulating Wall Street traders. From the perspective of the average retail client, it’s not simply about performing like a top-tier trader, it’s also important to look like one too, including being surrounded by dozens of flashing lights, multiple clocks, screens and the customary 24-hour financial news channel buzzing in the background.

Gamification should be designed to create brand loyalty and thereby hook traders to a platform. A recent study showed us that if a trader, as a rule of thumb, does 75 trades or trades for 75 days his LTV is maximized. Although this is not an easy task to do, to keep traders engaged, I suggest introducing sharper incentives and even including random lottery draws. In other words, emulate what casinos are doing to generate more clients who trade more for longer.

I am a firm believer that a trade action should be done in three steps:

1. capital allocation,
2. return, and
3. multiplier/boost (leverage) of returns.

Of course, some extra features can be implemented mid-trade such as stop-losses or timers to close an open trade.

If done correctly, complicated MT4 calculations such as margin requirements and lot size can be incorporated in just three simple steps. The same idea applies to strategies or following other traders.

Trade details such as floating profit/loss, fees and trade history must also be displayed somewhere in the platform but not as the major call to action, including some critical sections on education, capturing three distinct categories such as tradable news, indicators and an economic calendar highlighting which instruments will be affected.

For traditional education, an education website is a necessity. Moreover, the site should be hosted on a separate website supported by a different brand, and not in the platform itself.

I also think trading certificates are an effective tool way to generate brand loyalty from traders, especially novices that tend to rely on external sources for guidance.

In summation, I hope this article will encourage you to re-think existing processes and to consider incorporating quantitative and qualitative models to build tailored platforms for clients. Possibly the most important fact given current trends in financial technology, it is essential to address millennials and how social media can be used to improve outcomes when offering trading services to retail clients.

Originally published at http://www.financemagnates.com May 05, 2020.