Secondary research

Author: Patrick Jordan for Gain Capital, May 2016

Literature review
Market reports UK
Market reports US
Market reports APC
Internal reports
Industry articles
Scientific articles
Most common trader mistakes
Most common autotrading mistakes
Analysis
Trading psychology
Media review - documentaries
Emotions and trading

Literature review: Market reports UK

Investment trends and other research give us a thorough quantitative overview of the UK market

Report	Insights
Investment Trends, UK Leveraged Trading Report: Financial Spread Betting Industry Trends, November 2015 (Vol 1)	Lack of success biggest barrier to trading Ease of use and clean interface key Quality overtaking cost as main driver of switching
Investment Trends, UK Leveraged Trading Report: FSB Competitor Analysis, November 2015 (Vol 2)	Ease of use is the number one driver of FSB provider selection Charting and other platform features next Spreads and customer service also important
Investment Trends, UK Leveraged Trading Report: CFD Industry Trends, November 2015 (Vol 3)	Ease of platform use the number one driver of CFD platform selection Lack of knowledge major barrier to trading for new traders Lack of time for more experienced
Investment Trends, UK Leveraged Trading Report: CFD Competitor Analysis, November 2015 (Vol 4)	City Index is not highly rated for platform usability compared with competitors Nor is it rated highly for platform features, research tools or charting CI users main suggestion for improvement is charting (apart from spreads)
Investment Trends, UK Leveraged Trading Report: FX Industry Trends, November 2015 (Vol 5)	Lack of success knowledge and time are biggest barriers to trading Ease of use is biggest driver of provider selection Ease of account opening second
Investment Trends, UK Leveraged Trading Report: FX Competitor Analysis, November 2015 (Vol 6)	Many CI customers would value improved autotrading Many users unhappy with CI’s speed of execution Many CI clients use charts from other providers (one third user Bloomberg)
Foolproof, City Index, Trading Platform User Research, June 2014	Placing a trade online is difficult for those without experience People prefer a layout that reflects their style of trading Trading style and user journeys do not clearly correlate with trading experience
City Index (Larry Brangwyn), Online User Personas: UK Client Segmentation, January 31, 2014	Making money is all traders’ primary focus Early losses often lead to dormancy Lack of time is major barrier to trading

Takeaways

Making money is the primary focus of all traders and losing it the biggest barrier to trading

Ease of use is the main driver of platform selection

Similar research has been done in the USA

Report	Insights
Investment Trends, United States Foreign Exchange Report, June 2015	FX traders are becoming more price sensitive Numbers are down despite volatility Many have mastered the basics: want more help on analysis strategies and risk management
Rokkan, Forex.com Digital Strategy, Feb 19, 2014	Trading provision is a commoditized market, little competitor differentiation Need solid functional offer: low spreads, definite fills, quick trades Need emotional offer: help avoid losing money, peace of mind, fairness
Forrester Research, Forex.com Segmentation: Quantitative Research Findings, June 2009	Potential profit main reason for trading Most traders young, male, college educated, less risk adverse than average Average customer spends 16 hours/week on trading activities
Rokkan, Gain Capital. US Consumer Research Findings, April 30, 2014	Good returns important for all Status, freedom and control widespread drivers Perceived risk and effort are barriers for perspective traders

Takeaways

Traders want to make as much money as possible and to keep their costs down

Many, especially young men, enjoy the image and excitement that goes with trading

Literature review: Market reports APAC

We also looked at APAC

Report	Insights
GfK for Rokkan, Report for Forex Market Research in China, April 18, 2014	Many find it emotionally difficult to stick to their trading systems Don’t mind being treated like novices Platform stability and speed are main reasons for switching
Investment Trends, Singapore CFD and FX Report, August 2015	Ease of use number 1 selection driver for high value clients Losing money and lacking time are main reasons for stopping trading Customer service is number 1 priority for switchers
Investment Trends, Australia CFD Report: Competitor Analysis, June 2015	Ease of use by far the biggest driver of provider selection Number of new traders increasing Lack of time a barrier to trading for many
Investment Trends, Australia CFD Report: Industry Trends, June 2015	Lack of time, knowledge and funds were biggest barriers to trading Reducing commissions and spreads would increase trading volume Ability to manage risk would also increase volume significantly

Takeaways

People would trade more if they had more time and lost less

Ease of use is the main driver of provider selection

Internal reports

We have been developing our goals and strategies for achieving them

Report	Insights
Introduction to metrics used in account valuation, 2014	Asian accounts tend to have the highest lifetime vales (LTVs) except Japan which has the lowest Mean much greater than median (skewed by ‘extreme’ traders) Most accounts have stopped trading after two years
Platforms: In the Beginning (Joel Ippoliti), 2016	Business objective of the platform is to increase trade frequency, volume and quality (value to GC) User objective: to make money May need different offers for experienced and novice traders
Trading Platforms: The Beginnings of a Strategy (Joel Ippoliti), 2016	Need better understanding of what products appeal to which users and why Beginners want ease of use and safeguards Social trading is attracting users who haven’t traded before
City Index Marketing Campaign Q1/Q2 2016	Aiming mainly at switchers Position: We are making a unique commitment to help you be successful Based on alerts, analysis tools and automated trading

Takeaways

We aim to increase both the volume and value of trades that are placed by our clients

We want to attract both new and experienced traders and expect that they will want different things

Literature review: Trading behavior, industry articles

Few traders are successful, we need to understand why

Article	Insights
Online Trading Academy, Finding Your Style of Trading, April 22, 2014	Four styles of trading (time wise) Scalping (minutes or seconds); Day Trading (hours to a couple of days); Swing Trading (up to 2 weeks (usually 4-6 days); Position Trading (from months to years)
Paul Wallace, Eight Trading Rules I Wish I’d Known when I Started, August 1, 2014	Risk management first, speculation second Get a mentor Everyone pays for their trading education (formally or in losses)
Paul Wallace The Three Keys to Longer Lasting Trader Success	Process: have a logical trading system Discipline: stick to it in a diligent manner Self-awareness: monitor your emotions, know when not to trade
Investopedia, Behavioural Finance	People are not rational wealth maximizers: often behave irrationally Confirmation bias: More receptive to news that confirms original opinions Hindsight bias: Things can look obvious in retrospect, leads to overconfidence

Takeaways

People do not behave rationally when trading and this is a major reason why so few are successful

It is essential to be disciplined and manage risk

Literature review: Trading behavior, scientific articles

As well as industry research, there have been scientific studies of trading behavior

Research	Commonalities across segments
MIT Media Lab, Decoding Social Influence and the Wisdom of the Crowd in Financial Trading Network, 2012	Social trading provides better opportunities for profit than individual trading People make good decisions about who to follow when they can see others’ trades Social effects can over-ride rationality, especially in taking risks
Kahneman, Thinking Fast and Slow, Penguin, 2012	Personality characteristics that can be very helpful most of the time can lead to poor financial decisions Loss aversion: losing $100 gives twice as much pain as gaining $100 brings in happiness Optimism bias: we tend to believe that we have more control than we really do
University of Cambridge, Behavioural Finance	Affect: may overestimate how well stocks of companies we like will do Availability: we tend to use readily available information rather than seeking out more Similarity: tend to see patterns with paste events even if not there

Research

Commonalities across segments

MIT Media Lab, Decoding Social Influence and the Wisdom of the Crowd in Financial Trading Network, 2012

Social trading provides better opportunities for profit than individual trading

People make good decisions about who to follow when they can see others’ trades

Social effects can over-ride rationality, especially in taking risks

Kahneman, Thinking Fast and Slow, Penguin, 2012

Personality characteristics that can be very helpful most of the time can lead to poor financial decisions

Loss aversion: losing $100 gives twice as much pain as gaining $100 brings in happiness

Optimism bias: we tend to believe that we have more control than we really do

University of Cambridge, Behavioural Finance

Affect: may overestimate how well stocks of companies we like will do

Availability: we tend to use readily available information rather than seeking out more

Similarity: tend to see patterns with paste events even if not there

Takeaways

The ‘wisdom of crowds’ offered by social trading may mitigate individual irrationality to some degree, but it can encourage risky behavior

Being successful involves controlling emotions and overcoming personality traits

Literature review: Most common trader mistakes

We collated the view of leading experts to understand why traders lose money

	No reasonable trading plan	Not having a trading plan Having a trading plan that is too difficult Having a ‘mechanical’ trading plan Trading ‘noise’
	Not sticking to a trading plan	Not accepting a loss ‘Gut’ takes over Spot an opportunity ‘on the fly’ Getting greedy
	Following the crowd	Seeing a trend develop and jumping on thoughtlessly Following the advice of an ‘expert’ without being able to evaluate it
	Running losses and cutting profits	Holding losing positions in the hope that they turn Not wanting to admit that were wrong Quitting too soon while ahead Averaging losses
	Not using stops and limits adequately	No stops and limits set Stops or limits set too low or high Stop set to close, gets triggered by noise Stops and limits set in a way that gives a poor reward to risk ratio
	Poor money management	Accounts not properly funded Too much risked on a particular trade Too many open positions
	Failure to learn	Not reviewing and analysing trades Not taking responsibility for losses Not being focused enough in terms of markets and asset classes
	Trading in the wrong frame of mind	Become desperate to get money back after losing trades Become gung-ho after winning trades
	Lack of preparation	No trading training or education No research about individual trades Not knowing how to short (only going long)
	Lack of psychological discipline	Underestimating difficulty of trading Treating it as a hobby Overly high expectations Poor time management Lack of emotional control Procrastination

Takeaways

If we can help people avoid these mistakes they will have a better user experience

Literature review: Most common autotrading mistakes

We collated the view of leading experts to understand why traders lose money when autotrading

	Wrong mindset	Expecting big, risk free returns Thinking that little or no effort is required Assuming that they do not have to take any responsibility for their trades Focusing on gains not risk management
	Scams	Dishonest claims on forums Advertising huge risk free gains for no effort Signals that look good but use very high risk strategies
	Technology failures	Outages, connectivity and speed issues Software crashes No back up plan for these emergencies
	Superficial analysis	Only checking headline PnL (not open positions) Not spotting v. high risk strategies (e.g. Martingale)
	Lack of on-going evaluation	Many EAs performances degrade over time Social trading gurus performance can deteriorate
	Psychological pressure	Panicking because of volitility, big drawdowns or a run of losses Interfereing with signal as a result
	Poor risk management	Not understanding risk/reward ratios Not having risk-balanced portfolios Over-reliance on leaderboads (high risk stategies tend to lead)
	Poor money management	Placing large stake on volatile signal Mirroring large trades by gurus Danger of being stopped out
	Lack of preparation	No trading training or education No research about individual trades Not knowing how to short (only going long)
	Not matching signal to ambition	Choosing a signal that doesn’t give returns over the desired timescale Choosing a signal that is too stressful or too boring for the user’s taste

Takeaways

Autotrading can solve some of the problems people have when trading but can introduce other ones

Literature review: Trading psychology

Trading confronts people with sustained highly adverse psychological conditions

	Not accepting risk	Not all trades will be winning ones Success accrues over series of trades
	Impatience	Need to spend time developing plan Practice on a demo Test approaches and keep records of trades
	‘Non-mechanical’ mindset	Develop a strategy and stick to it rigidly Don’t try and trade intuatively unless very competent
	Rule aversion	Many people don’t like setting rules Sticking dilgently to strict rules essential to successful tradng
	Overconfidence	Overestimating ability leads to non-mechanical trading Overconfidence that trade will win leads to running losses
	Over-reaction	Expecting an item of news to have a greater effect than it does Trading too heavily on it as a result
	Loss aversion	Losses hurt more than equivalent wins Leads to people not closing losing trades and taking gains too soon
	Stubborness	Refusing to accept that trade isn’t going as predicted Stayiing in a trade too long and running losses
	Egotism	Trade affects self-esteem, become emotional Can lead to stubborness and overconfidence
	Attention	Not giving sufficient time to trading Getting distracted
	Lack of safety focus	Insuffficient attention to risk management Unrealistically high expectations of gain Risking too much money per trade
	Overweighting success	When reviewing trades give too much weight to successful ones Don’t learn from mistakes

Takeaways

Psychology accounts for at least 90% of the likelihood of trading success or failure

Media review

These documentaries followed traders of various levels of experience

BBC, Million Dollar Traders, ‘Make me a Trader’ Jan. 2009 (episode 1 of 3)

Key insights:

Having the right psychology and mindset is essential to trading effectively
Risk management is essential and you should always know your exposure
“Naked punting is for idiots”

BBC, Million Dollar Traders, 'Profit and loss' Jan. 2009 (episode 2 of 3)

Key insights:

Procrastination is a problem for many traders
“If you’re not invested you can’t make money”
People can know how to trade but lack the mental toughness

BBC, Million Dollar Traders, ‘Traders’ Jan. 2009 (episode 3 of 3)

Key insights:

Need to move onto the next investment and clear your mind of others
Trading brings horrendous highs and lows of emotions
Many traders go through the motions of analysis but trade on their gut anyway

BBC, Traders: Millions by the Minute September 2014 (episode 1 of 2)

Key insights:

If trading news you have to be an expert in reading between the lines
Psychological and emotional skills differentiate good and bad traders
People can freeze when trading real money having done well on demo

BBC, Traders: Millions by the Minute September 2014 (episode 2 of 2)

Key insights:

Only 10% of home traders make consistent profits
Most can learn the basic mechanics of trading within a few weeks
“Novice traders think about how much money they can make, professional traders think about how much money they can lose”

Bloomberg, The Player: Secrets of a Las Vegas Whale February 2014

Key insights:

Personalized entertainment and perks for high value gamblers (whales)
Desperate to get whales into casino, go further and further to ‘dazzle’
Negotiate special deals/rates with whales

Literature review: Emotions and trading

Emotions have four components, a qualitative descriptor and three quantitative dimensions. People are likely to trade better the more low-key or neutral their emotions are

F-PAD model of emotion
Feeling	A word that describes the emotion
Positivity	How good the person feels
Activation	Level of energy associated with the emotion
Dominance	Level of power that the person perceives they have

Trading and emotion
Positivity	Associating highly positive/negative emotions with winning/losing trades leads to poor judgement
Activation	High levels of activation can lead to risky behaviour; low can lead to unwise trades based on boredom
Dominance	Emotions with high or low levels of dominance can lead to over-optimism or pessimism

Examples of emotions. Each dimension is rated on a scale from -2 to + 2

Feeling	Positivity	Activation	Dominance
Jubilation	+2	+2	+2	Danger zone
Excitement	+1	+2	0
Satisfaction	+1	0	+1
Calm	+1	-1	0	Safe zone
Disappointment	-1	0	-1
Fear	-2	+2	-2
Anger	+2	+2	+2	Danger zone

Takeaways

The more we can help ‘dial down’ users’ emotion, the more successful they are likely to be