Popularity of day trading has soared since the outbreak of the pandemic. Millennials, who weren’t around for the last day trading hype during the dot-com era, are leading the pack. They have jumped onto low-cost trading platforms like Robinhood without any training or professional guidance. They are driving trading volumes to all-time highs. For January 2021, the average daily trading volume of equities was up almost 35% from January 2020 and up more than 100% from January 2019.
The historical data looking day trader’s success does not look good. Activity is the enemy of stock market success. Unguided day trading just does not work. Study after study shows that over any meaningful period of time, nonprofessional day traders perform incredibly poorly. By doing more, they earn less. Those who trade the most are hurt the most.
Here are the results of some studies:
Taiwan I
Perhaps the largest study ever done on day trading was on Taiwanese day traders in 2011. The study covered the 15-year period from 1992 through 2006. Of the 360,000 Taiwanese day traders who were typically active each year, fewer than 1% were able to earn positive abnormal returns net of fees.
Taiwan II
Another Taiwanese study looked at 130,000 day traders active from 1995 to 1999. That study found that in a typical six-month period, 82% of those day traders lost money. And they were losing money during a bull market!
Brazil
In 2019, a study of 1,600 day traders in Brazil was published. Over the 1-year period that these day traders were tracked, the study found that only 3% of them actually made money. Only 1.1% earned more than the Brazilian minimum wage! So, 97% of day traders lost money.
US
A 2000 study at the University of California, Berkeley, examined 66,000 trading accounts at Charles Schwab from 1991 to 1996. The study found that trading volume is the enemy of investment performance. While the overall market had an annual return of 17.9%, the most actively traded Charles Schwab accounts earned an annual return of only 11.4%. That means the more active traders underperformed the market by a massive 6.5%.
In the long term, the stock market moves in your favour. You just need to take your time and let it work for you. While markets go up and down in the short term, over the very long term, the market goes up consistently at a rate of roughly 10% per year. That is more than enough to make you rich if you give it enough time.
Sven Franssen