Crypto trading is a zero-sum game with clear winners and losers.

This competitive stage yields countless self-proclaimed profitable traders on Twitter and YouTube. As the players downtown make their livelihood trading for institutions like Galaxy Digital and Pantera Capital, how do their strategies compare to those of retail home-based traders? Do retail methods even work?

“Broadly speaking, larger institutions are mostly directional agnostic and generally focus on market making,” Bill Herrmann, CEO of investment firm Wilshire Phoenix, told Cointelegraph.

By directionally agnostic, Herrmann means institutions do not trade based primarily on direction. Directional trading refers to placing trades on the long or short side — essentially betting on the market going up or down. In contrast, non-directional trading strategies take advantage of various trading products, bots and other aspects to make money outside Bitcoin’s up or down movements. Retail trading often involves a notably different approach. Such traders are often largely on their own to learn and find success.  

Most traders fail

Crypto trading is like mainstream stock, futures and forex trading in a number of ways. Participants use price charts, indicators and fundamental drivers for trade rationale, sculpting trading strategies after hours of testing.

“Profitable day traders make up a small proportion of all traders — 1.6% in the average year,” according to a Tradeciety article, citing data from the book Do Day Traders Rationally Learn About Their Ability. “However, these day traders are very active — accounting for 12% of all day trading activity.” 

That said, trading is very difficult. Unlike sports and other events, when people conduct trades or investments, they enter into a ring against the best professionals in the industry. A similar analogy sees an average Joe stepping off the streets straight into an NBA game. The outcome would not end well for Joe. 

Trading has changed since the crowded city-based rooms portrayed in movies

“Regarding retail traders, I think very few of them are really successful,” David Carman, former Chicago Board Options Exchange pit trader and co-founder of tech hub FinTank, told Cointelegraph. 

“Most floor traders were unable to transition successfully from the pits to electronic trading,” Carman explained. “With few exceptions, they’re all gone,” he added. “The benefit of trading in a pit was leaning on the brokers. You lose that edge trading electronically.”  

Gone are the days of crammed trading floors hosting participants yelling for trades. Floor trading needed brokers on the floor, entering and exiting positions for traders at their command. Knowing the broker well was an edge on the competition. As trading turned digital, that edge disappeared.  

The equipped professionals against the self-taught masses

Institutional traders essentially place orders on behalf of other people or companies, using funds allotted to them by those entities. These traders oversee large sums of capital, having the guidance, tools and technology of the company for which they work. On top of that, these firms often recruit battle-tested traders with proven track records of success, or bright, gifted individuals holding significant programming knowledge just entering the field. 

On the other side are retail traders. This population consists of anyone with an internet connection, money to invest and a jurisdiction that allows it. The barrier to entry for crypto trading is many times lower than traditional market trading. Users can easily jump from exchange to exchange, funding their endeavors with cryptocurrencies or bank account transfers. 

These folks are mostly individuals looking to make extra money for themselves, controlling their own capital. A plethora of trading tactics and knowledge lives online and in books, available to any motivated self-starter. Trading classes also exist online, but the web is muddied with false information and self-proclaimed experts selling information that may or may not prove effective. 

Even with the best information, trading still boils down to personal fit. What may work for one person may not work for the next. It’s a battle of emotion, discipline and organization. 

Institutions and traders with significant capital trade differently

Institutional traders, by nature, must trade differently as they deal in large order sizes. They cannot simply buy any given asset at the current market rate without moving that asset’s price a fair bit.

Herrmann’s comments show these traders taking a different approach than retail traders, who often bet on the market going up or down. “Retail tends to trade with a directional bias and typically deploys popular momentum based strategies, indicators such as RSI and Stochastics,” Herrmann said referring to popular technical analysis charting tools. 

He added:

“This is a good way to get a quick view of the market and can be quite useful for spotting divergences, but including these indicators on one chart, as many retail traders do, is a mistake – basically each one is telling the same story.”

Technical analysis indicators come in many shapes and sizes. Different categories of indicators exist for gauging factors such as volume, momentum and time. As Herrmann mentioned, using multiple different indicators of the same type, at the same time is less effective because they all show similar conclusions, composed in a slightly different manner. 

Retail traders selling their methods

In many instances, retail trading involves a number of different charting indicators, patterns and techniques. These methods may or may not work depending on how they are used. A large number of paid educational groups, online classes and YouTube videos teach these methods, but which of these can you trust?

Each approach and tool varies based on the trader, usually only giving that trader a higher percentage of success on any given trade, depending on the factors taken into consideration. Such tools are by no means a guarantee of success.

Herrmann said: 

“The practice of selling indicators or even strategies has gotten out of control with many websites making outlandish claims about how easy trading is or some promising completely unrealistic returns. There is no magical technical indicator, but that’s not to say that retail traders cannot make money – it’s just a lot of hard work, but stick with it, and develop your own edge.”

According to Herrmann, institutional traders do not use the same charting strategies and indicators seen in the retail herd. He said the difference is “like night and day.”

Institutional players trading directionally on behalf of funds combine several different factors, including momentum, price and volume for their trades. Simply weighing one metric or tool is not effective, giving the trader only a partial view of the market state. Using indicators or market aspects together, however, yields vastly different outcomes. “It does not matter if you're institutional or retail – the result is extremely powerful analytical tools,” Herrmann explained. 

Retail trading can be effective

It is possible to make money with retail trading, but that is easier said than done. Although he did not mention the same aspects as Herrman, CNBC Africa crypto analyst and Twitter personality BigCheds laid out a few other important tactics in retail trading. 

“The key to successful crypto retail trading is risk management,” he told Cointelegraph. Managing risk involves a preset plan detailing the amount a trader can lose on any given trade, while still keeping on pace with his or her odds of success for future trades. 

According to BigCheds, planning and discipline are two other keys to success. “Entering a trade with a plan, sticking to the plan and sticking to your stop-loss and profit taking levels,” all hold as winning elements, the analyst said. “When the trade is over, using a trading journal to learn from experience is a critically important step as well.”

“Also luck helps,” he added.

Public traders need discipline

Winning in the game of trading requires discipline, said OKCoin Head of Market Development Matthew Ficke. “Repeated success requires preparation. New traders can easily get caught up in the emotion of the market, and make poor decisions as a result.” He added:

“Experienced traders define a strategy and risk management parameters before entering a trade. They study the market, find their ‘edge’ and exploit it repeatedly. Professionals create structure for each individual trade.”

Ficke explained a simple example in which a person goes into a long position (they buy into an asset or trading product) at a planned level. They then input a stop-loss order and a profit-taking sell order at predetermined levels, leaving the trade to play out. The trade either hits the target or loses a set amount of money determined by the stop-loss. 

Barring a notable alteration in market conditions, which might call for trade reevaluation, disciplined traders hold to their system, ultimately voiding distracting noise from the equation, Ficke explained. Risk amounts also play a role. If traders risk less than they plan to make on each trade, it can give more room for losses factored into a system.

“By applying structure, the trader’s performance over time is more predictable and sustainable, while they can isolate the part of their process that requires improvement to increase their returns,” Ficke said, adding:

“These principals are the same for traditional and crypto markets. Success requires time, effort, research and structure. Different personalities tend to gravitate towards different types of trading strategies. In that sense, the 'edge' building element of trading is personal and dynamic over time.”

As cryptocurrency in general continues its path of mainstream adoption, many new participants may try their hand in trading the asset class. Achieving success in most areas of life requires hard work, discipline and learning, matched with a bit of natural ability or affinity. Trading appears no different.