The global financial markets attract millions of participants every day. From retail stock and forex traders to institutions employing teams of professionals, the returns generated by a particular trader can vary considerably. While one trader may lose half of their portfolio due to poor decision-making, another may generate generational wealth seemingly overnight.
In general, timing the market is seen as an exceptionally difficult strategy to pull off successfully in the long run, which is why most professionals advise beginners to invest instead of speculating about the market, as it often leads to substantial losses, as opposed to massive gains.
Understanding how much FX traders make against their professional counterparts can be difficult to assess, but long-term observations do reveal a significant gap in average performance between retail and professional traders, both on forex and stock markets.
What advantages do professional traders have?
We cannot discuss the returns of professional stock and FX traders without mentioning the inherent advantages that play in their favor. Access to a large amount of funds, sophisticated training and professional strategies, technical tools and research reports make it easier for professionals to make informed decisions and outperform the market.
For example, a trader employed at an investment bank has access to some of the most advanced trading software and data feeds available on the market, which makes day trading, swing trading and long-term investing much easier to handle. While it is true that these advantages in no way guarantee results, but they do create a lot of levers professional traders can pull in order to deliver superior returns.
Biggest challenges retail traders face on the market
On the other hand, retail traders often lack the necessary hardware and software to take full advantage of the opportunities available to them, which contributes to the lower returns generated by them. A lack of professional training in the theory and practice of trading also means that most retail traders rely on trial and error, which can cost them a lot of money before, and if, they arrive at a consistently profitable trading strategy.
On the other hand, retail traders may face less stress than professional traders, as they choose when and if to enter a particular setup, as most retail traders have full-time jobs that provide their primary income sources.
Average returns of professional traders VS retail traders
To better visualize the success rate of professional and retail traders, we can look at the average returns of each subset of traders, particularly on the forex and stock markets, which are two of the most active markets for traders:
- Professional traders make average returns of between 7-10%, which is largely in line with the stock market returns over time. As for forex traders, returns average between 10 and 30%. However, it is also worth noting that most forex traders tend to lose money
- Retail traders typically underperform stock market returns by an average of 2-3%, which is caused by the challenges associated with trying to time the market. On the other hand, about 70-90% of retail forex traders tend to lose money on the market. Furthermore, only 1-3% of retail stock traders remain profitable over the long run
While the difference in returns is clearly in favor of professional traders, becoming one is subject to a lot of challenges. On the other hand, becoming a retail trader and managing your own finds autonomously appeals to a large number of people, even if their average returns may significantly underperform their professional counterparts.
Conclusion
While professional traders have a clear edge in terms of returns over retail traders, especially on the forex market, retail traders have much more freedom when it comes to what to trade and how to formulate their strategies.
Where professional traders have a major advantage over retail traders is the access to high-end trading software and hardware, which allows them to analyze markets at a much faster rate. Furthermore, professional traders have access to more capital, which also comes with hedging opportunities to reduce the overall risk of the portfolio allocated to them by their firm.
Overall, professional traders typically generate a minimum of 2-3% more when trading stocks and almost twice as much when trading forex, compared to their retail counterparts.
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