Thursday, August 14, 2014

What Proportion of Daytraders Actually Makes Money?

I strongly recommend reading the research study of speculator skill from Barber, Lee, Liu, and Odean.  They studied the returns of daytraders over a 15-year period, the largest sample I am aware of in such a study.  Their study is also unique in that it looks at the ability of traders to make money in a second year after having made money in the first.  

The authors conclude that "there is clear performance persistence."  The very top traders who make money net of fees tend to continue to make money going forward.  The traders who lose money tend to continue losing money.

Here is the most important conclusion, however:

"In the average year, 360,000 individuals engage in day trading.  While about 13% earn profits net of fees in the typical year, the results of our analysis suggest that less than 1% of day traders (less than 1,000 out of 360,000) are able to outperform consistently." (p. 15).  

In other words, 87% of day traders in a given year lose money after fees are taken into account.  About .28%--one in 360--is able to make money after fees year over year.

To be sure, that small group of very successful day traders earns a significant return.  After expenses, they average +28 bps per day.  Compare that to the 350,000 out of 360,000 daytraders who average a daily loss of 5.7 bps per day after expenses. 

The authors conclude that day trading skill genuinely exists.  They also conclude that it is very, very rare.  

Further Reading:  Can Day Traders Be Successful?


jdbear said...

I find it hard to believe I'm that special. Be that as it may, it's about finding valid patterns and would not be able to do it without a good backtesting platform.

Markus said...

Hi Brett, I'm somewhat surprised by those numbers.

Have a look at these figures:

45% of IB's clients are net profitable, 33% of Oanda's, and 42% of CitiFx's.

Those numbers are better than what you could expect starting a business I'd say.

I believe that if you are disciplined, accept that it's just a numbers game, where it's not about being right or wrong, where the individual trade is irrelevant compared to the sum of all your trades over time, understand that you need a method that provides you with positive expectancy, then you stand a realistic chance of making more than you lose.

Best regards,


John Roberson said...

Markus, that's just one quarter, and the profits aren't necessarily from day-trading.

bangem andleavem said...

I'd say the number was quite low , prob under 3%, but .28%?

Depends what you mean, 100k a year or more , maybe.

forextrader said...

It can be true. Lets say we have 10 traders. 3 of them are profitable and rest of them lost money. So we have roughly 33% profitable traders. Next year another 3 traders were profitable and rest of them lost money. So on average we have 33% wining traders every year. But on personal basis all of them loosing over the time. It's just assumption and probably I'm wrong, but it's possible.