[9/14/14] excerpts from this investorhome article
There have been many studies that have concluded that most day traders lose money, but there have also been studies that documented successful trading by day traders. The data currently available seems to imply the following results.
- The majority of new day traders probably do lose money.
- At some firms a very high percentage of day traders lose money.
- However, there is some evidence that a majority of (surviving) day traders at some firms are profitable and many traders generate tremendous returns on their money.
- Industry commentators also suggested in the past that day-traders using software at home are much less successful than those trading at professional day trading firms.
... there have been a number of studies and investigations
with less encouraging results. The most frequently cited is a study by
Ronald L. Johnson for the NASAA. Johnson concluded in
An Analysis of Public Day Trading at a Retail Day Trading Firm -
Report of the Day Trading Project Group Findings and Recommendations (8/9/99) that the majority of traders studied lost money and the vast
majority of traders ran the risk of losing their entire stakes.
In an administrative complaint filed against a now-defunct day-trading firm, Massachusetts securities regulators alleged that only one of the branch's 68 accounts made money. According to an article in the NYTimes (Day Trading's Underbelly (8/1/99)) day trading has exceptionally high "washout rates" and "regulators who have examined the books of day-trading firms say that more than 9 out of 10 traders wind up losing money. Because most of these people disappear quietly when their cash runs out, few who replace them in the trading rooms know about them or their failures."
In "Day trading is a quick road to financial ruin" (5/5/99), Humberto Cruz of the Sun Sentinel cites Laura Walsh, a certified financial planner who said she prepared 40 tax returns the prior year for investors doing online trading, and not one made a profit. According to Walsh none of the traders had any idea about the concept of the spread.
In The Profitability of Day Traders (Nov/Dec 2003) in the Financial Analysts Journal, Douglas J. Jordan and J. David Diltz found that about twice as many day traders lose money as make money. Approximately 20 percent of sample day traders were more than marginally profitable.
We also have some international evidence thanks to Brad M. Barber, Yi-Tsung Lee, Yu-Jane Liu, and Terrance Odean. In there paper Do Individual Day Traders Make Money? Evidence from Taiwan they found that day trading by individual investors is prevalent in Taiwan – accounting for over 20 percent of total volume from 1995 through 1999 (individual investors account for over 97 percent of all day trading activity). They found that heavy day traders earn gross profits, but their profits are not sufficient to cover transaction costs and that in the typical six month period, more than eight out of ten day traders lose money. Yet they still found evidence of persistent ability for a relatively small group of day traders to cover transaction costs.
Another interesting question that follows along the same lines is whether it is possible to train individuals to become successful traders. The question was asked several times by Jack Schwager in his interviews with successful traders in the best seller Market Wizards. While hardly scientific, the following observations from the book are certainly interesting.
Richard Dennis described an experiment where 40 of 1000 applicants where chosen and 23 were eventually trained. According to Dennis "It’s frightening how well it worked." 3 dropped out, but the successful 20 (known by many as the "turtles") averaged 100% profits per year.
However, others interviewed in the book were apparently less successful in training others and less optimistic about probabilities of success.
Bruce Kovner discussed trying to train perhaps thirty people, and only four or five turned out to be good traders. The other 25 left the business and according to Dennis "it had nothing to do with intelligence."
According to Brian Gelber five or less out of every 100 people who go to the floor to become traders make at least a million dollars within five years and at least half will end up losing everything they came in with.
Tom Baldwin responded that less than 20 percent of those who come to trade on the floor are still around after five years and one percent are successful to the point of making and keeping at least a couple of million.
In an administrative complaint filed against a now-defunct day-trading firm, Massachusetts securities regulators alleged that only one of the branch's 68 accounts made money. According to an article in the NYTimes (Day Trading's Underbelly (8/1/99)) day trading has exceptionally high "washout rates" and "regulators who have examined the books of day-trading firms say that more than 9 out of 10 traders wind up losing money. Because most of these people disappear quietly when their cash runs out, few who replace them in the trading rooms know about them or their failures."
In "Day trading is a quick road to financial ruin" (5/5/99), Humberto Cruz of the Sun Sentinel cites Laura Walsh, a certified financial planner who said she prepared 40 tax returns the prior year for investors doing online trading, and not one made a profit. According to Walsh none of the traders had any idea about the concept of the spread.
In The Profitability of Day Traders (Nov/Dec 2003) in the Financial Analysts Journal, Douglas J. Jordan and J. David Diltz found that about twice as many day traders lose money as make money. Approximately 20 percent of sample day traders were more than marginally profitable.
We also have some international evidence thanks to Brad M. Barber, Yi-Tsung Lee, Yu-Jane Liu, and Terrance Odean. In there paper Do Individual Day Traders Make Money? Evidence from Taiwan they found that day trading by individual investors is prevalent in Taiwan – accounting for over 20 percent of total volume from 1995 through 1999 (individual investors account for over 97 percent of all day trading activity). They found that heavy day traders earn gross profits, but their profits are not sufficient to cover transaction costs and that in the typical six month period, more than eight out of ten day traders lose money. Yet they still found evidence of persistent ability for a relatively small group of day traders to cover transaction costs.
Another interesting question that follows along the same lines is whether it is possible to train individuals to become successful traders. The question was asked several times by Jack Schwager in his interviews with successful traders in the best seller Market Wizards. While hardly scientific, the following observations from the book are certainly interesting.
Richard Dennis described an experiment where 40 of 1000 applicants where chosen and 23 were eventually trained. According to Dennis "It’s frightening how well it worked." 3 dropped out, but the successful 20 (known by many as the "turtles") averaged 100% profits per year.
However, others interviewed in the book were apparently less successful in training others and less optimistic about probabilities of success.
Bruce Kovner discussed trying to train perhaps thirty people, and only four or five turned out to be good traders. The other 25 left the business and according to Dennis "it had nothing to do with intelligence."
According to Brian Gelber five or less out of every 100 people who go to the floor to become traders make at least a million dollars within five years and at least half will end up losing everything they came in with.
Tom Baldwin responded that less than 20 percent of those who come to trade on the floor are still around after five years and one percent are successful to the point of making and keeping at least a couple of million.
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