Matthew Cheung
Matthew Cheung

Technological advancements in retail trader platforms

In a digital age there’s no surprise that most our time is spent on smart phones. Smart phone statistics have rocketed over the past 5 years with now over 70% of people within the UK and USA owning a smart phone. Has the rise in accessible technology made it easier for retail Forex traders to trade or has it made it even more confusing? That’s what we’re here to tackle.

First Published: e-Forex Magazine 87 / Retail FX trading / July 2019

UK Device penetration (2012-18)
UK Device penetration (2012-18)

One thing for certain is that smart phones have made it even easier to access brokerage platforms who offer mobile apps. Statistically, smart phone penetration has increased over 30% in the last 6 years while desktop has remained stagnant. In the competitive environment of the broker industry most have caught on by providing users with easy to navigate applications on most devices. Some could see this as a useful addition to their computer application, however, smart investors at institutions know not to touch it.

Mobile trading  (Usefulness rating: 3/5)

If you’re a retail trader you must remember one thing, that having “better access doesn’t necessarily mean more profitability”. It can actually mean the opposite. In the end, brokers alike have made it much easier to access their software and thus made it easier to click that buy or sell button. The actual analysis part of your trading is near impossible to execute on a smart phone alone limitations such as display size and functionality can make it difficult for retail traders to apply other techniques to trading such as quantitative analysis, advanced risk management and data mining.

Advantages of mobile trading

The ease of pulling out your phone and opening your trading platform makes it particularly useful if you’re on the go or you have a lifestyle which means you travel a fair amount. However, trading is not all about staring at charts so the usefulness of this is also questionable. This leads us to the benefit of checking real time data. Some serious investors and traders like to keep an eye on day to day activity in the markets. If you’re at work, then it can be hard to access this data, but now brokers have enabled access to various assets which you can access on your smart phone device.

Sometimes, when there’s market hysteria you may not want to be in positions. Let’s say Trump just started to tweet about Tariffs, you may want to get out of positions due to the unexpected volatility. This is what mobile trading also allows you to do, by applying simple risk management techniques on the go it can actually potentially help you prevent some heavy losses.

Disadvantages of mobile trading

There’s no surprise that you’re limited when trading on mobile, just think about it, why are professional institutional traders not bothering to use their mobiles? The most obvious one being that small device screens can make it difficult for your analysis methods. Especially for those looking to trade over longer time horizons. What about assessing fundamentals? Well, near impossible on a mobile screen, in theory you’d want to be using third party software like excel to track data to come up with comprehensive trade ideas. Blindly clicking the buy or sell button on the phone can be a slippery slope.

Easy access was a good thing, right? Well, it may be for some, but for others easier access increases the likelihood of over trading and revenge trading. Exposing yourself to the markets more causes traders to trade more frequently than they should be. Just look at the statistics, up to 90% are losing at any given time trying to day trade.

Finally, there’s security. Just like any electronic device and application there’s security risks. In a contactless world if you were to lose your phone or your phone was stolen. Your trading account and activities could be put at risk. Most platforms have made it easy to access the app but have not considered security threats. So, you’ll have to be extra careful when downloading unknown applications and keeping your phone safe in pubic.

The main benefit of mobile trading is to prevent unwanted exposure in times when you’re on the go
The main benefit of mobile trading is to prevent unwanted exposure in times when you’re on the go

Conclusion

What can we conclude from mobile trading as a retail trader? Well, if professional institutional traders are not using mobile trading. Why should you? The harsh reality is mobile trading is not developed for retail traders in mind and is merely an attraction for the retail trader.

  • The main usefulness is having access to the market while on the go, this can potentially reduce overall exposure in the market when it’s not wanted.
  • Trading itself is limited in functionality and hardware due to screen size, analysis should be done on a computer with thorough thought.  

Social Trading (Usefulness rating: 2/5)

This leads us onto the fast-growing concept of social trading. Simply put, social trading allows investors and traders to monitor other traders’ activities and if they like the look of it, they can literally copy their trading activities or mirror their behaviour. This is very attractive for the naked eye with no financial literacy, however, those who understand the financial markets will realise that this concept is not the holy grail solution.

Advantages of social trading

Interactions with like minded traders. If you’re a retail trader, you can find yourself in an isolated environment most the time. Sitting at home by yourself, in the office or in a secluded room. Social trading however brings together traders alike which can be a good way to help build the confidence and retention required to see results.

These interactions alone can then help bring confidence and motivation towards trading. Social trading itself can be a way to increase confidence in not only your own trade ideas but in ideas from others with successful track records. As a new trader you’ll realise that even these successful traders take losses, but in the long run their rewards outweigh their costs. Not everyone is so keen on social trading though, many serious traders want to learn methods themselves so they’re not reliant on others in their trading activities. Which leads us onto the disadvantages.

Social trading can give a snapshot of retail investor sentiment which can be used as a contrarian indicator
Social trading can give a snapshot of retail investor sentiment which can be used as a contrarian indicator

Disadvantage of social trading

The main disadvantage of social trading is that not every trader is the same. Some traders start out with more capital than others and some have higher risk tolerance than others. On top of this, you don’t fully understand the situation the trader you are copying is in. For example, the person you are copying may already have a diversified portfolio outside of trading and they’re merely using trading as a form of high-risk short-term speculation. If you were to copy this person’s activities and have the same results it would also require you to have the same investments as that person.

Social trading itself also creates that false sense of security, when you have many likeminded individuals group think becomes more apparent. Especially in the social age of followers creating credibility, just because they see an individual has many followers they automatically think they’re credible but in reality, that’s not the case. As a retail trader you should always be looking at the statistics of the individual. Such as, what drawdown is the trader taking, what Sharpe and Sortino ratio is the trader performing at, what’s the average risk to rewards etc…

Finally, there’s the sense of overconfidence. The concept of social trading is made out like a holy grail strategy, “Copy the professionals”. However, there’s a clear flaw, you’re copying other retail traders, you’re not copying professional institutional traders. As we know from statistics up to 90% of retail traders lose 90% of their capital within 90 days. Why would you want to copy traders who lose majority of the time and go bust?

Trading requires discipline
Trading requires discipline

Conclusion

  1. Useful to gauge retail sentiment, possibly using it as a contrarian indicator.
  2. Understanding different trader perspectives can potentially fill any holes you missed in analysis.
  3. Directly copying traders should be avoided as individual traders’ circumstances are unknown.

Best course of action

In reality, trading will always require the individual to put tremendous amount of effort into not only learning the financial markets properly but making sure they conduct thorough analysis themselves and applying risk management techniques. Think of it like this, would you give your money away to someone who is losing 70, 80, 90% of the time? That’s basically what you’re doing when you’re copying trade ideas.

  • Mobile tradings main benefit is to prevent unwanted exposure in times when you’re on the go, such as at work or commuting.
  • It should not be used regularly to execute trades themselves but a useful addition to your trading plan for contingency.
  • Social trading overall is attractive to the retail trader, but in terms of usefulness it’s fairly slim. The main use of social trading would be to obtain a grasp of potential retail sentiment at that point in time and potentially use this as a contrarian indicator as you know up to 90% lose at one time, you’d like to have an opposite view to the crowd.

Retail traders’ best course of action would be to fully educate themselves for the first two years of trading. Learn how professional traders at hedge funds and the proprietary trading side of investment banks trade. This includes possible methods such as the global macro approach. Only once they comprehend these methods and understand the infrastructure of the market should they then look to get serious about trading.