In the midst of a speculating frenzy and the madness of crowds, it’s easy to get trapped in the belief that day trading is easy money. Survivorship bias and glamorous pics in social media make us blind to the low probabilities of making it big in day trading. The fact is this:
What percentage of day traders make money and how many fail? Approximately 1-20% of day traders make money day trading. Just a tiny fraction of day traders make any significant amount of money.
That means that between 80 to 99% of them fail. We have looked at plenty of research and very few traders can brag about making any significant amount of money day trading. Proprietary traders seem to fare better than retail traders (perhaps as expected).
Let’s have a look at the reports we have looked at:
What percent of proprietary day traders fail (case study 1)
Do proprietary traders perform better than retail traders? After all, proprietary trading attracts traders that supposedly treat day trading much more like a business than retail traders do.
Back in 2008, a trading shop named Tuco Trading was deemed illegal by the SEC because Tuco had prop traders that were “customers in disguise”.
When the court case started Tuco had to reveal all the trading stats for their traders (or clients, if you like). Almost all traders were day traders. If we assume the papers from the court case are correct, we can conclude that even “prop” traders fare badly at day trading:
- 206 active traders per 31. December 2007.
- 33 profitable (16%).
- 173 unprofitable (84%).
- 7 with more than 50 000 USD in profits (3%).
- 57 with losses over 10 000 USD (28%).
This shows that even for day traders who treat it like a business the percentage of failing traders is quite high.
What percent of proprietary day traders fail (case study 2)
After the dot com bubble, the proprietary trading shop Broadway Trading published their stats. The study is old, but we still believe it has relevance. Broadway offered both remote and office trading for its traders.
For the month of July 2001, 196 traders of 559 made a profit, which equals 35%. According to the principals of Broadway Trading, this number is below the average during the dot com bubble in 1998-2000: they claimed 79% made money in April 2000, a month in which Nasdaq fell heavily.
In February 2000, the percentage of profitable traders was 81%. For the whole of the year 2000, 42% made money while the first half of 2001 showed 42% of traders making money.
Keep in mind that the survey only separates profits or losses. Those making a living out of this are even lower.
Broadway also revealed that those trading from home were less profitable than those trading in an office together with other traders. Some trading offices had good traders and were able to have a culture of winning traders.
How many percent of day traders fail in Brazil
A pretty famous study called Day Trading For A Living made by three academics tracked 1 600 Brazilian day traders for over one year. Only 3% made money! The results might be even worse because they tracked only those who lasted over 300 days.
Also worth noting is that only 1.1% of the day traders made more money than the minimum wage.
How many of day traders fail in Taiwan
Another frequently cited source (The Cross–Section of Speculator Skill Evidence from Day Trading) was done in Taiwan and conducted over a time span from 1992 until 2006.
The conclusions are twofold:
- Few day traders are able to earn positive abnormal returns net of fees – a small group of about 15% made more than commissions and costs.
- Variation in investor skills is an important feature of financial markets.
The authors made a second survey published in 2013 where they claimed that less than 1% of the day traders are able to predictably and reliably earn positive abnormal returns net of fees.
Why do day traders fail?
Several of the studies we have gone through claim overconfidence in trading is one of the main reasons why day traders fail. This might be correct, but the authors have overlooked one very important aspect:
Trading is a zero-sum game. Long-term investing is not a zero-sum game because you have a tailwind from increased profits and earnings. What is best – trading or investing? Trading might be scalable, but it comes at a cost in the form of a high risk of failure.
But when you are a day trader you can’t benefit from the long-term tailwind. Add to this commissions and slippage and you get a minus-sum game.
In other words, the market is “rigged” so only a few consistent traders make money. The main purpose of amateurs is to provide prey and energy for the bigger players further up the food chain, according to Victor Niederhoffer in The Education Of A Speculator.
Trading is just like poker: all the players around the table can’t win – what you win some others must lose. Who are your rivals? Who are the predators? You need to understand where you are in the food chain.
How to avoid losing money as a day trader
Day trading is about avoiding unforced errors, to borrow a term from tennis. The famous investor and partner to Warren Buffett, Charlie Munger, likes to inverse. We have previously written an article where we inverted how you can improve your odds in trading: how to fail as a trader.
This blog is all about quantitative trading. We believe this is the best approach to trading. It requires study and a lot of work, but our own anecdotal evidence is that this increases the probability of reasonable success drastically.
Also, keep in mind that 80% of the job is just showing up. In trading, this means you need to be there every day to learn and get experience. Just by surviving the learning curve you probably increase your odds dramatically.
- The correct mindset for trading
- Habits of wealthy and successful traders
- Street smarts beat book smarts in trading
- Why programmers and traders are bad traders
- Can You Day Trade With Daily Bars?
What percentage of day traders fail? Ending remarks
Sadly, most day traders lose money because short-term trading is a zero-sum game. To avoid being a losing day trader, we recommend trying to develop a quantitative approach to trading. This website is all about quantified trading strategies and we are confident you can find a profitable trading strategy on our website. We also have some single strategies and strategy bundles for sale – all based on daily bars and not day trading strategies.
What percentage of day traders fail? The evidence we compiled for this article suggests that about 80-95% of day traders lose money.
Certainly, the article delves deep into the challenging realm of day trading and the statistics surrounding its success rates. It primarily focuses on empirical evidence from various case studies and academic research to provide a comprehensive view of day trading's reality.
Let's break down the concepts mentioned:
Success Rates in Day Trading:
- Percentage of Successful Day Traders: Approximately 1-20% of day traders make money, suggesting a high failure rate ranging from 80-99%.
- Proprietary vs. Retail Traders: Studies showcase that proprietary traders, although seemingly more business-oriented, also face significant challenges. Case studies from Tuco Trading and Broadway Trading show varied success rates among traders:
- Tuco Trading: 206 active traders with only 33 profitable (16%), 7 with substantial profits, and 57 facing losses over $10,000.
- Broadway Trading: Varying success rates, such as 35% in July 2001, dropping from 79% during the dot com bubble.
- Global Studies on Day Trading Failures:
- Brazil: A study of 1,600 Brazilian day traders found only 3% profited, and a mere 1.1% exceeded the minimum wage.
- Taiwan: Research spanning from 1992 to 2006 revealed that only about 15% made profits net of fees, while a 2013 follow-up suggested less than 1% could consistently earn positive returns.
Reasons for Day Trading Failures:
- Overconfidence: Noted as a significant reason for failure among day traders.
- Zero-Sum Nature of Trading: Highlighted as a critical factor; day trading is perceived as a zero-sum game where a few consistent traders profit while amateurs contribute to the larger players' gains.
Strategies to Mitigate Losses:
- Quantitative Trading: Advocated as a more structured approach to trading, emphasizing study, and hard work to increase the probability of success.
- Consistent Engagement: Emphasizes the importance of consistent effort and learning to navigate the learning curve in trading.
Day Trading Realities and Recommendations:
- Market Nature: Day trading is likened to poker, where not everyone at the table can win, emphasizing the importance of understanding one's position in the market.
- Mindset and Approach: The article stresses the significance of adopting a quantitative approach and recommends exploring strategies based on daily bars rather than strictly day trading strategies to improve odds.
Conclusion:
- Success Rate Recap: The compiled evidence suggests that approximately 80-95% of day traders tend to lose money, highlighting the challenging nature of short-term trading.
In essence, the article underlines the harsh reality of day trading, backed by numerous studies and empirical data, and recommends adopting structured strategies and mindsets to navigate the inherent difficulties and improve the odds of success in trading.
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