Why You Can’t Make Money As A Day Trader
If you’ve been following my writing for a while, you’ll know I’ve pointed out the futility of day trading many times.
However, several readers have pushed back on this and asked for proof of my claims. It seems they all know someone who’s been a very successful day trader, or they claim to be doing well at day trading, and so on.
So what’s the evidence for my negative bias against day trading? Is it stronger than the anecdotal success stories?
I tracked down some studies that make it quite clear that day trading is a very risky and near-hopeless way of making money in the markets.
The first study is titled “The Profitability of Day Traders” (Jordan and Diltz in 2019).
Jordan and Diltz examined the profitability of 324 U.S. day traders using data from February 1998 through October 1999 across seven branch offices of a national securities firm. This firm specialized in day trading.
There are two important things to note here:
1) This was during the spectacular, exponential rise of the NASDAQ prior to its big crash
2) This was a day trading specialist firm with all the bells and whistles available for its traders
Even with those huge advantages, Jordan & Diltz found that only 116 traders (35.8%) made any money at all.
And of those fortunate 35.8%, 19.4% made more than $5,000 and 14.2% made more than $10,000.
So less than 1 in 6 traders made 5 figures of profit over 18 months. And that was in a specialized firm during an ideal day trading market with tech stocks rising like rockets everywhere.
It gets worse in another day trading study I found.
“Do Individual Day Traders Make Money? Evidence from Taiwan” (Barber, Lee, Lin, and Odean in 2004) examined day traders in Taiwan from 1995 to 1999.
They found that in a typical six month period, more than 80% of day traders lost money. Only a select few were able to consistently earn profits that were large enough to cover their transaction costs.
In “Day Trading for a Living?” (Chague, De-Losso and Giovannetti in 2019), the authors showed it was “virtually impossible for individuals to day trade for a living, contrary to what course providers claim.”
They examined day trading statistics between 2013 and 2015 in the Brazilian equity futures market. Their findings? About 97% of all traders who persisted for more than 300 days lost money.
It seems that only 1.1% of day traders earned more than the Brazilian minimum wage. And only 0.5% (that’s 1 in 200) earned more than a bank teller’s salary as day traders.
All that work, all that stress, all that risk, and yet day traders earned only paltry returns. Their regular salaried jobs paid better.
The study also found that “the proportion of successful players also monotonically decreases with the number of rounds played.”
So the longer day traders kept day trading, the worse their results.
I think that’s pretty damning proof.
Day trading simply isn’t viable as a means of income for all but a very tiny handful of people. You have to be the equivalent of a pro athlete in terms of your emotions, discipline and other factors to be successful at the day trading game.
While many traders probably think they’re in that special Olympian category, the sad truth is that they really aren’t. The studies have proven it.
Therefore day traders waste endless hours and dollars trying to accomplish something that’s pretty much impossible.
Now that begs the question …
Why bother when there are much better ways to make a living from the markets?
Here’s the secret: take the time to slow everything down to the point where your emotions aren’t a factor. That’s why I never look at anything lower than a daily chart.
When you’re calm, rational and objective, then you trade your chosen method consistently with good risk management and little if any over-trading.
That’s what keeps you from making big mistakes and compounding them before you regain control of yourself.
In fact, just avoiding dumb errors goes a long way to making you profitable over the long run.
Far too many traders trap themselves into a “get rich quick” mentality and forget that it’s the tortoise, not the hare, who wins the race.
The more you carefully focus on building your skills and maintaining your discipline and your edge in the markets, the better off you’re going to do.
Does that all make sense now?
Avoid day trading and look at trading over longer timeframes the way I do. That’s how I’ve made literally millions in the markets.
Let me know if you have any questions.
P.S. If you want to check out the papers I’ve referenced for yourself, here are the links:
The Profitability of Day Traders
Day Trading for a Living?
Do Individual Day Traders Make Money? Evidence from Taiwan
And this article offers some additional commentary on the Day Trading for a Living? Study:
Traders React to a Study That Says It’s Virtually Impossible to Day Trade for a Living