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?