If you're day trading, you're probably losing money

Day trading has become a popular hobby in the past year as investors around the world were faced with economic shutdowns and social distancing measures.

But while day trading may seem like a fun way to make some supplemental income or even a potential way to earn a living, studies suggest the average day trader tends to do more harm than good to their investment portfolio.

The Numbers

In a recent blog post, A Wealth of Common Sense's Ben Carlson highlighted several large studies that paint a very bleak picture of day trading as a whole:

• One study of Brazilian futures traders found 97% of day traders lost money over a period of 300 days.
• Another study of day traders in Taiwan between 1995 and 2006 found only 5% of day traders to be profitable.
• A study by the U.S. Securities and Exchange Commission of forex traders found 70% of traders lose money every quarter on average, and traders typically lose 100% of their money within 12 months.
• A study of eToro day traders found nearly 80% of them had lost money over a 12-month period, and the median loss was 36%.

In the blog post, Carlson said people are free to invest or trade their money any way they choose, and there are a handful of professional retail traders that make day trading work on a consistent basis. However, the studies show that path is an uphill battle.

“Make sure you go into this with your eyes wide open with the understanding that day-trading is hard and it generally comes with a higher tax bill than a long-term buy and hold strategy,” Carlson wrote.

Beware Success Stories

Sean Bandazian , investment analyst for Cornerstone Wealth, says that only a very few exceptional traders are successful in the long-term.

“Most successful traders with longevity discover a style that consistently works for them, and the majority of the time that style doesn’t involve taking concentrated positions intraday,” Bandazian said.

He also said anyone reading about success stories of day traders who got rich quickly should keep those stories in perspective.

“The reality is you only hear the success stories. People should understand that there are exponentially more people that lose money trying to catch lightning in a bottle,” Bandazian said.

“The obvious issue with the get rich quick mentality is it usually involves taking massive concentration risk in a volatile asset. You might have success initially, but all it takes is one bad trade to bury your account.”

Conclusion

The stock market is a proven mechanism for wealth creation over the long term, and it has a remarkably consistent historical performance over 30-year timeframes. However, the shorter your trading time frame is, the more the market becomes a zero-sum game, and it’s extremely difficult for the average retail trader to compete with the resources and speed of professional institutional traders and algorithms.