A day trader is an individual who regularly buys and sells equities the same day. The occupation, if it is one, is apparently highly click-worthy. There are many confident online reports that a day trader can return profits of 10 percent each month, or no, wait, that's 18 percent per month or ... you get the idea. Pick a profit percentage. There's someone online waiting to tell you that's how much you can make. The reality is that all academic studies of the practice conclude that, with few exceptions, you can't make money day trading at all. Since it's always fun to dream, start with the myth.
The Myth
Many of the online articles are specific about the profit ratio you can expect when you become a day trader. For example, an article by Cory Mitchell that appears on the Vantage Point Trading site lays it out in detail and assumes beginning trading capital of $30,000:
"Assume you average five trades per day, so if you have 20 trading days in a month, you make 100 trades per month. You make $3,750, but you still have commissions and possibly some other fees. Your cost per trade is $5/contract (round-trip). Your commission costs are: 100 trades x $5 x 2 contracts = $1000."
In Mitchell's example, your net after commissions is $2,750. Since you started with $30,000, that's a monthly return of a little over 9 percent. If you reinvest those profits on a monthly basis, at the end of one year, you'll have a profit $55,944 and change. Not bad, and the best news is, you don't even need to get dressed for work.
The Reality
Here's a strong indication that the reality may be quite different from the myth.
According to a 2013 study of the Taiwanese stock market led by economist Brad Barber of the University of California, Davis, Graduate School of Management, and encompassing everyday trade in that market over a 14-year period, less than 1 percent of all participant traders made a profit. Putting it another way, 99 percent of all day traders lost money.
Yeah, but That's Taiwan
Another study by Barber and fellow UC economist Terrance Odean analyzed the market returns of over 66,000 U.S. households trading the U.S. stock market over a five-year period from 1991 to 1996. They concluded that frequent traders (not day traders, necessarily, but including day traders and those who trade stocks frequently) underperformed investors who employed a buy and hold strategy by about a third. The more frequently a given participant traded, the more they underperformed the average return.
But That Was More Than 20 Years Ago
True, more recent studies, like the 2013 research study at the Cass Business School at City University of London concluded that monkeys throwing darts at the stock pages could achieve better results than stock traders. OK, they were digitally simulated monkeys, but still.
To give you a better idea of your chances as a "professional" day trader, consider that the regulatory North American Securities Administrators Association lists trading seminars – the online "trading colleges" that offer to teach you how to succeed as a day trader – as a top 10 threat to investors, along with Ponzi schemes and esoteric trading algorithms based on Fibonacci numbers.
Why Day Trading (Almost) Never Works
There's a reason that day trading is hazardous to your wealth that's agreed upon by behavioral market theorists like Robert Shiller and efficient market theorists like Eugene Fama, both Nobel Prize winners in economics. The short-term behavior of markets reflects billions of rapidly fluctuating values responsive to evolving conditions that approximate a random walk, and there's no theory on Earth that can predict market behavior well enough to predict what will happen next consistently.
Yet, there's that 1 percent. If day trading is such a bad idea, why doesn't everyone lose money? This is a tantalizing question without a single answer. In most cases, it's the phenomenon of the stopped clock, which, despite the fact that it isn't working, still displays the correct time twice a day.
Even if it's only 99 percent, not 100 percent certain that you'll lose money attempting to day trade, why would you want to invest your money in an enterprise where the odds are 100-1 against you?
Research indicates that the average length of time between the opening and closing of a futures trading account is a little more than three months and that when the account closes, most participants have lost all their money.
