Day trading: How many traders lose money?

The dream of day trading promises big profits in the shortest possible time. That's why ordinary people try their hand at a quick game on the stock market. Some simply start without any further preparation (and realize after their first losses that it's not quite so easy after all). Others ask questions in forums on the Internet beforehand.

«95 percent of all traders lose money», they then read in an article. And in another forum they read about the 90-90-90 rule: «90 percent of all traders lose 90 percent of their capital in 90 days». These figures are sobering, but none of them are proven. We have therefore set out to search the scientific literature for the question: How many traders lose money?

What does the science say?

To get straight to the point: We have not found the answer. We still don't know how many traders lose how much money. This is because most traders give up quietly and secretly. They do not publish their figures.

Perhaps the question of success in day trading needs to be asked differently. In their 2010 study, Californian researchers Brad M. Barber, Yi-Tsung Lee, Yu-Jane Liu and Terrance Odean broke it down into two questions: How many traders have remained traders and are still trading? And how many of them make regular profits?

What they found out is sobering: the first 40 percent gave up within the first month. After five years, a total of 93 percent have said goodbye to trading. (I hope for their sake that their losses were not too great).

Even the remaining seven percent are not all successful traders. On the contrary. They are still trading after five years. But six percent are still not profitable. (Perhaps they have made the stock market a hobby? Perhaps they are just particularly stubborn, constantly losing money, but simply have enough lucrative main income and still believe that they will make it one day? That would be the next exciting study...)

Only the best of the best are still around after five years and are also profitable. As Barber, Lee, Liu and Odean summarize: «Day traders with a strong performance in the past will continue to achieve strong returns in the future. However, after fees, only one percent of them are predictably profitable.»

One percent. One trader in a hundred.

What are the alternatives?

Fortunately, things look different for long-term investors. They are almost all successful in the long term. For them, the market is not a zero-sum game. In the long term, it's win-win. Because the cake grows when the economy grows, and everyone gets a slice.

This rarely brings the double or even triple-digit returns that traders dream of. But the rewards are there even if you do little more than decide that you want to participate. For example, very conveniently with asset management from True Wealth.

Links

• Brad M. Barber, Yi-Tsung Lee, Yu-Jane Liu, Terrance Odean: Do Day Traders Rationally Learn About Their Ability?