Do Day Traders Make Money? (Part 2)
by Unknown Author
In Day trading is a quick road to financial ruin (5/5/99), Humberto Cruz of the Sun Sentinel cites Laura Walsh, a certified financial planner who said she prepared 40 tax returns the prior year for investors doing online trading, and not one made a profit. According to Walsh none of the traders had any idea about the concept of the spread.
A study by Houston-based Momentum Securities Management Co. came to mixed conclusions. The study has not been released to the public but was described in several articles including a comprehensive article in the LATimes by Walter Hamilton, one of the most knowledgeable reporters on the topic. See Study Finds Beginning Day Traders Lose Money and Study Shows Many Day Traders Are Landing in the Loss Column (via SOES.com). The study of 107 traders for several months at six of Momentum's Texas offices found that 6 of 10 newcomers and more than one-third of experienced traders lost money. After a three-to-five-month "learning curve," the study found that profitability of traders improved with 65% making money and 35% losing money. Regulators pointed out that the study covers only a narrow group of traders over a brief period and survivorship bias may be an issue with this study. Additionally it apparently was not compiled by an independent source.
A recent article in the Wall Street Journal (Single-Stock Swappers Trade One Stock and One Stock Only $$ (12/7/99)) about day traders Gary Ratner (who trades CMGI) and Jeff Easton (who trades Yahoo!) suggests that they routinely make more than $2,000 a day. According to the article, Mr. Friedfertig says that through Nov. 30, 67% of Broadway's 400 active traders -- those who trade at least 3,000 shares a day -- were profitable for the year, and 78% of those who've traded for more than a year made money.
Another interesting question that follows along the same lines is whether it is possible to train individuals to become successful traders. The question was asked several times by Jack Schwager in his interviews with successful traders in the best seller Market Wizards. While hardly scientific, the following observations from the book are certainly interesting.
Richard Dennis described an experiment where 40 of 1000 applicants where chosen and 23 were eventually trained. According to Dennis "It’s frightening how well it worked." 3 dropped out, but the successful 20 (known by many as the "turtles") averaged 100% profits per year.
However, others interviewed in the book were apparently less successful in training others and less optimistic about probabilities of success.
Bruce Kovner discussed trying to train perhaps thirty people, and only four or five turned out to be good traders. The other 25 left the business and according to Dennis "it had nothing to do with intelligence."
Marty Schwartz discussed hiring four people but nobody lasted.
According to Brian Gelber five or less out of every 100 people who go to the floor to become traders make at least a million dollars within five years and at least half will end up losing everything they came in with.
Tom Baldwin responded that less than 20 percent of those who come to trade on the floor are still around after five years and one percent are successful to the point of making and keeping at least a couple of million
The percentage of profitable day traders is certainly an important number, especially for those considering day-trading as a potential career opportunity, but another relevant question is whether day traders in aggregate make or lose money. After all, in many industries a small percentage of the players make the majority of the profits. For example, let's hypothetically say that only 10% of day traders make money. Just that information certainly isn't encouraging. But what if we now assume that the average loss for each of the 90% that lose money is $100,000, while the 10% of profitable traders go on to earn an average of $2 million. We could then say that the expected return for all day traders in aggregate is greater than 100%. If 9 lose $100,000, but the one in ten successful traders earns millions, we now have a different picture. In fact, based on those numbers day trading is a better proposition than the lottery or casino gambling, where the house always holds the advantage by any measure. So clearly in analyzing the success of day-traders, we must analyze not only the percentage of day traders that make and lose money, but also the amounts that they win and lose individually and in aggregate. Regardless, it should be obvious to everyone that day trading as a career is only for people in the financial position to sustain the probably losses.
Another important issue for potential day traders to consider is their opportunity costs. For instance, lets say day trader Loren has $125,000 in capital, currently makes $100,000 a year, and quits a job to start day trading. Loren . Loren expects to use $25,000 for living expenses for the next six months and the remaining $100,000 for risk capital. At the end of six moths Loren has lost half the capital and is left with $50,000. How much is Loren out from making the decision to day trade?
The answer is not $50,000. Loren has day trading losses of $50,000 but that’s not all. Loren also gave up $50,000 in income from the job left behind, which brings us to a $100,000 pre-tax difference. And the final cost is the opportunity cost of not investing the $125,000, since that money could have been invested in stocks or bonds. So in reality a decision to day trade can cost you a lot more than the capital you lose trading. The time and opportunity costs should also be considered in evaluating the profitability of day trading for any individual.
Oh frac! I knew there was a flaw somewhere!Yes, it's a fractal until you get to the last 20 people in your 5/95 measure...and then it can't be a fractal any longer
I am just trying to work out what you mean by 'transversely'. Is that something to do with Dracula?
Yep, I've packed my cape away in a box, normal now... well, nearly.Now that's interesting isn't it? Wayne used to sleep in a crypt during daylight hours, there's even a picture of him in his favourite cape somewhere here on ASF (lol!), everything is upside down in Australia....but I think he's normal again.
Thanks lesm for that first article by the anonymous trader (the second one was good too)...seems to be a trend follower, he must have created a simple system that's very easy to trade.
BSG fan???
Yes, I believe in the 95/5 rule for active traders. I believe I am currently in the 5%. Reason: I'm trading a backtested positive expectancy plan.* Do the people preaching 95/5, presume themselves to be in the 5%? If so, how do they quantify this? By what measure do we separate the 5% "elite" from the 95% of presumably losers?
Yes, I believe this is a fractal, and within the 5% who are winning because of money management I believe there are 5% who are the much talked about and mysterious supertraders who seemingly effortlessly extract large sums of money from the markets consistently. You only hear about such traders obliquely as they have no need for fame.* I there a fractal at work? Of the 5%, is there a further separation of 95/5? What does that say about the 95% of the 5%? Does this continue up a fractal scale?
i thought it was the 80/20 rule
Many aspire to this level. Few achieve, as it requires a true trading edge, something which trend trading does not provide.
No.I'll bite too. Can swing trading provide it?
I'll bite.
Yes, I believe in the 95/5 rule for active traders. I believe I am currently in the 5%. Reason: I'm trading a backtested positive expectancy plan.
Yes, I believe this is a fractal, and within the 5% who are winning because of money management I believe there are 5% who are the much talked about and mysterious supertraders who seemingly effortlessly extract large sums of money from the markets consistently. You only hear about such traders obliquely as they have no need for fame.
Many aspire to this level. Few achieve, as it requires a true trading edge, something which trend trading does not provide.
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?