Extreme volatility has become a trap for traders

An analysis of market dynamics during COVID-19 showed a significant increase in trading activity among retail traders. According to the Australian Securities and Investment Commission, ASIC, retail investors have actively used short-term trading strategies in unsuccessful attempts to catch price trends.

The regulator said in a statement that the frequency and volume of intraday trading had increased significantly, and the retention period of investments has fallen sharply. This indicates an increase in short-term transactions and intraday trading activity.

In a period of high volatility, even professional traders find it difficult to calculate the market, and the risk of losses increases many times.

Attempts to make money in troubled markets are especially dangerous for retail investors. They can result in serious losses, perhaps in an already difficult time for their financial situation.

Retail investors are trying to capitalize on short-term strategies. However, ASIC writes that such tactics never yielded consistently good results – neither in calm nor in tense times.

The analysis carried out by the regulator showed that only a few managed to make quick money. During the study period, stock prices fell the day after retail investors were net buyers in two-thirds of cases. In those days when retail investors were net sellers, their stocks almost always renewed growth the next day.

In addition to growth in trade, the regulator noted the influx of new investors into the market and the intensification of so-called “sleeping accounts”.

The high probability and impact of unpredictable news on offshore overnight markets only amplify the risks. In this regard, ASICs are particularly concerned about the major increase in retail investor trading in complex, often risky, investment products. These include professional exchange-traded instruments, as well as CFDs, the so-called CFDs.
Trading activity in the Forex and CFD segments increased significantly against the backdrop of a surge in volatility.

Leverage on CFDs increases investment risks and sensitivity to market volatility, so retail customers should be especially careful with investments involving the use of borrowed funds. For example, in the week of March 16-22, 2020, the net losses of retail customers of 12 CFD brokers amounted to $234 million.