Most day traders lose money

Day traders have terrible track records.

Academics studying stock pickers have long observed that the vast majority of professional money managers – around 85% – weaken their benchmark over a multiyear period.

They are now changing their sights on professional retail day traders, warning that the same bad results apply to them as well.

“The author of A Random Walk Down Wall Street” has written by Princeton Professor Burton Malkil in a blog for Wealthfront, where he is the Chief Investment Officer. “Serious investments use investment instruments such as broad diversification, rebalancing, proactive tax management, avoidance of market time, staying the course and ETFs with rock bottom fees. Don’t be misled with false claims of easy profit from day trading Do.. “

Malkil’s endorsement is a large body of academic studies running over 20 years that show frequent day traders and other very active traders have difficulty making money for anything more than short periods of time.

The most recent study, “Attention Induced Trading and Returns: Evidence from Robinhood Users,” was published in October and examined Robinhood’s trading activity from May 2, 2018 to August 13, 2020. He particularly studied “extreme cinematographic events,”. Where Robinhood merchants crowded into special stock.

He concluded that during these extreme “herring events”, “the top 0.5% of the stock bought by Robinhood reverses each day’s experience by an average of about 5% the following month while more extreme herring events account for about 9%.” Reverses. “

Conclusions: “Large increases in Robinhood users often occur with large price spikes and then reliably yield negative returns.”

Why did this happen? The authors noted that most Robinhood investors are inexperienced, so they chase performance. The app’s layout, which draws attention to the most active stocks, causes traders to “buy stocks more aggressively than other retail investors.”

Finally, the ease of use of the site, and the fact that it is commission-free, can also encourage trading. “As caused by many times higher turnover rates than other brokerage firms, Robinhood users are more likely to do speculative trading and invest in their retirement savings, liquidity demand, tax-loss sales, and rebalancing. The reasons are less likely. “

Why does the stock rise when Robinhood shuts down traders so quickly? In addition to the mean reversal, the authors suggest that short sellers are fully aware of the Robinhood trading pattern. He wrote, “These vicissitudes are known as shares attracted by stock Robinhood users in significant short interest.”

A Robinhood spokesperson declined to comment on the study, but said in a statement to CNBC: “[W]See E, most of our customers buy and hold, and 98% of our customers are not pattern day traders. “

Nevertheless, other studies of day traders have come to similar conclusions.

A study published in June of approximately 1,600 Brazilian day traders monitored their activity for a year and concluded that only 3% made money. The authors avoided claims that day traders could make money in a short period of time (a day or a week), and focus on day trading activity over a longer period of time.

Their conclusion: “We show that it is almost impossible for day-to-day trading for living individuals, contrary to what the providers claim. We observe all individuals who entered the Brazilian equity futures market between 2013 and 2015 Started trading, volume terms in the third world. We find that 97% of all individuals who have lost money for more than 300 days. Only 1.1% earned more than the Brazilian minimum wage and only 0.5% made Earned more than the initial salary of a bank teller – all with great risk. “

Oh, is that so.

A 2011 study of Taiwanese day traders over a 15-year period from 1992 to 2006 showed only slightly better results. Day trading is popular in Taiwan. In an average year, about 360,000 Taiwanese people engage in day trading, according to the authors.

His conclusion: “Consistent with prior work on the performance of individual investors, most day traders lack money.” They note that a smaller group (around 15%) makes higher net returns of returns, but “some better performance would be expected with sheer luck.”

A later version of the paper published in 2013 concluded: “Less than 1% of the day’s population can predictably and reliably earn positive abnormal returns.”

What about a small group that can do better than sheer luck? The authors speculate that “one day the way traders can turn a profit is to supply liquidity through passive limit orders to undocumented investors who are too eager to pay for quick execution.”

In other words, the small fraction of day traders who actually make money in Taiwan trade with “dumb money” – second-day traders and general investors.

An earlier study, going back to 2000, did no better for day traders. Brad M. of the University of California, Berkeley. Barber and Terence Odion analyzed 66,000 trading accounts at Charles Schwab from 1991 to 1996. They found that those who earned the highest annualized returns of 11.4%, while the market overall traded at 17.9%. .

Given this evidence, why is day trading continuing, and why is it so popular? The authors concluded that very active traders feel they know more than they actually know. “Overconfidence can explain the high trading levels and poor performance resulting from individual investors,” the authors said.

His findings are among other studies. “Our central message is that trade is dangerous to your wealth. … Those who do the most business are the most hurt.”

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