Marching to the Drumbeat of Retail Traders



    Retail trading is a burgeoning market that caught institutional traders by surprise in 2020. Dubbed the retail trading army by many entrenched institutions, this new breed of trader is proving to be a formidable force in the financial markets. According to the Financial Times and Bloomberg Intelligence, retail trading dramatically increased in 2020 during the coronavirus-led lockdowns across the planet. Millions of new traders have taken to online trading platforms. Expectations of profitable trades are driving this mass migration to licensed operators like Robinhood, E*TRADE, StocksToTrade, Fidelity, and TD AmeriTrade, et al.


    What began as a novelty for retail traders – pretty much anyone who is not an institutional trader – rapidly became a mass movement. The inherent risks for untrained retail traders are substantial, but the learning curve is being facilitated by way of easy-to-understand guides, resources, trading tools, platforms, and demo accounts. Traders are taking to stocks, forex, commodities, indices, and crypto trading in their droves, and this begs the question: is there some sort of day trading for dummies guide available? The answers to day trading concerns are vested in the determination, dedication, and commitment to learning on the part of the trader.


    Massive Spike in Retail Trader Activity


    Top-tier trading platforms present retail traders with a wealth of options to better understand the financial markets. It all begins with the selection of a reputable, credible, and trusted broker. The quality of the brokerage can be assessed by way of the assets available for trading purposes, the execution of trades, the quality of customer support and service, multi-device availability and functionality, and regulatory approval. If any ingredient is lacking, it serves as a weak link in the trading chain. The average daily trading of equities has increased sharply since 2019. Consider that CNBC reported the following average daily volumes:


    • 2019 – 7 billion average daily trades
    • 2020 – 10.9 billion average daily trades
    • 2021 – 14.7 billion average daily trades (January 22, 2021)


    Y-O-Y, January volumes shot up 92%, and Piper Sandler is of the opinion that most of these gains are the result of huge retail trader participation. It is against this backdrop that it becomes increasingly important to understand how to day trade for a living. Retail trading activity is largely focused on a combination of no name brand cheap stocks such as penny stocks of up-and-coming companies, and the popular household names such as Tesla, Microsoft, Amazon, Apple, Google, Facebook et cetera.


    Dispelling the myth of ‘profit generation only through appreciating assets’ is difficult at first for traders to accept or understand. However, it is entirely possible to trade financial instruments to the downside as well. This means that shorting stocks can yield favorable returns if trades move in the trader’s favor. Buyers and sellers are realizing the profit potential of the financial markets, and they’re doing so with aplomb. Traditionally, institutional traders tend to hedge against call buyers. But now there is so much enthusiasm in the market by dint of retail buying (without assessing the fundamentals of the underlying financial instruments) that stock prices are ballooning.


    All of the speculation taking place has also driven incredible gains in the cryptocurrency market, but that’s largely attributed to institutional investor interest in blockchain technology. With so much information to digest, it becomes absolutely critical to consult the right trading tools and resources. While professional fund managers may be downplaying the markets with negative sentiment, the overwhelming power of retail traders going all in has turned things around. An unprecedented rally has not taken place, and the newfound online trading freedoms of retail traders are helping to keep the rally alive. Amateur traders are flooding the US markets en masse, and CreditSuisse estimated that 33% of trading activity to date is due to these retail traders.


    Are Fundamentals or Emotions Driving Markets?


    There is a real fear that retail traders buy on sentiment, not on fundamentals. This means that social trading and massive speculative sentiment on social networks with retail traders can turn markets on their head. If the fundamentals don’t count as much, but the psychology of amateur traders does, it presents a conundrum to analysts. Market experts are now having to take noneconomic factors into consideration when assessing the viability of market performance. Sentiment and emotion are difficult to quantify, and extremely volatile in the interconnected day trading community of retail traders.


    Many examples abound, not just the GameStop phenomenon of 2021. Retail traders are learning that the power of the crowd can certainly fuel a stock price rally with pump and dump schemes, buying the dip, and by taking on the institutional traders and hedge funds. The ever-changing focus of retail traders makes it difficult to assess their next move; the flavor of the day is determined on social media platforms, and acted out on online trading platforms. Institutional short sellers may have thought about dumping travel stocks like Carnival, Marriott, Boeing and the like, but retail traders believe that those stocks were ripe for the picking since coronavirus lockdowns would ultimately be lifted.


    All in all, the power of the crowds is certainly a formidable force in the financial markets. That does not detract from the importance of learning how to day trade in order to benefit from changes in asset prices.