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Do Day Traders Make Money?

| | Posted in: Individual Investing

Could we make a bundle day trading? In their May 2004 paper entitled “Do Individual Day Traders Make Money? Evidence from Taiwan”, Brad Barber, Yi-Tsung Lee, Yu-Jane Liu and Terrance Odean assess the success of day traders in the Taiwan stock market. Using detailed individual trading records, they find that:

  • Day trading accounted for more than 20% of total trading volume during the sample period.
  • Individual investors account for almost all day trading.
  • About 1% of individual investors account for 50% of day trading and 25% of individual investor trading volume.
  • All categories of day traders tend to move the market; they do not bid low and wait for bargains.
  • Over 80% of day traders lose money after transaction costs.
  • The most active day traders earn a daily spread of 31 basis points – insufficient to cover transaction costs. Occasional day traders experience both gross and net losses.
  • In general, day traders must hold unrealistic beliefs about their chances of success.
  • A few day traders persistently earn profits sufficient to cover transaction costs, achieving a daily spread of 62 basis points. These successful day traders react more quickly than other investors to changing market conditions.

In summary, day trading is risky business. Practice and speed appear to be critical success factors.

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