The case for day-trading: there isn’t much of one

A story about two day traders in California

The Sunday New York Times, which features human interest stories more than “hard” news, ran a story that recounts “a day in the life” of two day traders in California last weekend.  They support themselves by trading for their own accounts using technical indicators.

The more successful of the two says he has earned $100,000-$120,000 a year from his trading business over more than a decade.  He and his partner also give lessons to others, as well as trading for themselves.  They charge $199 a month and on the day the NYT followed them around they had at least 21 subscribers.  If those students all stuck around for a year, the trading “school” would generate income of about $50,000.  It’s not clear whether these fees are included in trading income.

When asked about how they operate, the two traders are “momentarily stumped” and “struggle to put a finger on what set-ups (i.e., favorable trading opportunities) are or how to spot them.”

Trading results on the day in question?  –60,000 shares traded, $300 in commissions, a loss of $135.

Academic studies:  active traders have worse results than their less active peers

in the US

The article then cites an academic study of US discount brokerage clients that seems to verify what professional investors in the US fervently believe, that the more you trade, the worse your results are.  Trading is emotionally satisfying but deadly to your bank account.

and in Taiwan

To me, however, the most interesting part of the article is its reference to an as-yet unpublished academic study of frequent traders in Taiwan (earlier versions of the paper can be found online ).   Why Taiwan?  — day trading data there are publicly available.  The research finds that a small core of individual day traders consistently makes money, but 99% of day traders make losses. Related research by the same authors shows that in Taiwan foreign institutions are the most profitable traders, followed by other institutions, ex corporations–which lose money after transaction costs.  Individuals as a class lose money, even before costs.

I don’t think Taiwan is a microcosm for the world as a whole.  My experience with this country is that individuals’ investment preferences and the universe of possible investments are far different from those in, say, the US.  Two things strike me, however.  The number of stocks available on the Taiwan Stock Exchange is relatively small vs. the US, suggesting that American day traders face a more daunting task than those in Taiwan.  Also, I wonder why corporations are consistent trading losers in Taiwan.  If their activity were relationship investing, one wouldn’t expect a lot of trading.  Since other trading in Taiwan seems to be symmetrical–foreigners win, locals lose; institutions win, individuals lose–could there be a symmetry between the small cadre of winning day traders and the loss-making behavior of corporations?  Hmm.  What would that mean?

Why I think day trading makes so little money Continue reading