Friday, April 25, 2014

Can Day Traders Be Successful?

Is it stupid to pursue day trading?

Back in 2008, I wrote about a research study that suggested that the great majority of day traders lose money, but it is "not entirely a fool's game", as the largest participants demonstrated skill and success. 

An update of that study finds that there is evidence of cross-sectional variation in day trading skill:  those who make money in one year are more likely to be profitable in the following year and vice versa.  Altogether, about 15% of traders studied earned meaningful returns (enough to overcome trading expenses) over the course of a year.

I'm not sure pursuing day trading is any more stupid than pursuing a Hollywood career or a calling to become a WWE wrestler.  Many are called, few are chosen in most performance fields.

What *is* stupid is thinking that you can be in the elite group of performers without substantial deliberate practice and experience.  I know of several day traders who have enjoyed very long careers of consistent success.  Every one spends significant screen time absorbing market patterns and working on their craft.  

Barber and team also cite evidence that day traders not only learn from their trading experience, but also show signs of failing to learn from experience.  In their study, for example, 24% of all traders had histories of prior losses and they accounted for over half of all day trading volume!

In short, day trading is like American Idol tryouts.  A few contestants are really good and a few of those become true stars.  Many are fair to middling and never go anywhere.  And a few are so head-scratchingly awful--and unaware of their awfulness--that you wonder how they can persist in their talent delusion.

Is it stupid to pursue a dream?  Not if you wake up and are willing to do what's necessary to make it a reality.

Further Reading:  Why It's So Easy to Lose Money in Markets