Friday, 27 September 2013

Day trading: only two out of ten make money; fewer do so consistently


We analyze day traders in Taiwan.

1. Day trading is prevalent in Taiwan – accounting for more than 20 percent of total trading volume during our sample period.
- Individual investors account for virtually all day trading (over 97 percent).
- Day trading is heavily concentrated. About one percent of individual investors account for half of day
trading and one fourth of total individual investor trading volume.

2. Our analysis of performance indicates day trading is treacherous, but not entirely a fool’s game.
- Heavy day traders, as a group, earn gross profits (before transaction costs).
- Thus, heavy day traders do appear to have a trading advantage over other investors.
- The stocks bought by the most active day traders outperform those sold by 31 basis points per 21 day.
- Unfortunately, the gross profits of heavy day traders are not sufficiently large to cover reasonable estimates of transaction costs.
- Thus, as a group, they lose money.
- In contrast, occasional day traders experience both gross and net losses.
- The stocks bought by occasional day traders actually underperform those sold, even before considering
transaction costs.

3. There is considerable cross-sectional variation in the performance of day traders.
- Over the typical six month horizon, using lower range assumptions regarding transaction costs, less than 20 percent of day traders earn profits net of transaction costs.

4. These results paint a rather dim portrait of day traders. However, we do document a select few are able to consistently earn profits sufficient to cover transaction costs.
- We identify day traders who earn substantial profits over a six-month period and analyze the performance of their subsequent trades.
- These profitable day traders continue to earn stellar returns.
- The average day trader in this group earns a semi-annual income of over $NT 1 million from his day trading activity, though the group’s median income is a more modest $NT 126,000.
- The stocks they buy outperform those that they sell by 62 basis points per day.
- These profits survive transaction costs.
- In other words, there is strong evidence of persistence in the ability of day traders.

Our analysis makes clear the need for comprehensive risk disclosure.
Prospective day traders should be apprised of their likelihood of success: only two out of ten make money; fewer do so consistently.

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