“The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation.”
— Gordon Gekko
Simple trading notwithstanding, one of the most common truisms around the trading industry is the failure rate of new day traders. Ask almost anyone and they will cite the 95% failure rate more quickly than a stop that’s too tight gets elected.
There are a number of reasons for this, but I think two drive the bus…
- the “true” failure rate and
- the difference in willingness to talk between those who find success in the markets and those who don’t
Read on to see just how wrong this notion is.
The First Leg Of The 95% Failure Rate Of New Day Traders
First, make no mistake, there actually is a high failure rate among the large group of folks who wade into financial markets each year:
- Some blow out their accounts fairly quickly using an exceedingly complex approach of which they have little to no understanding.
- Others bleed their accounts more slowly using a robust strategy, but combine it with flawed execution.
- Still others pack it in and simply give up with their accounts intact more or less, but their psyches damaged beyond recognition.
- Finally, you have those who come to trading looking for some action only to find that when done correctly, trading is often… boring. This particular group usually finds ways to make trading a little more interesting… and a lot less profitable.
As you can imagine folks from these groups (and those like them) do little to learn about and/or prepare for trading (much less day trading).
They generally operate under the “it looks easy, so let’s get it…” mantra.
Taking the time to investigate, read, receive teaching/mentorship, practice and really develop a “trader’s mindset” are not high on their list of priorities. As a result they fall victim to the dreaded high failure rate of new day traders.
Contrast these groups with the man who decides to learn and use short-term trading in his spare time, but takes it seriously.
He devours every book he can find on the subject.
He attends trading webinars and live seminars and develops a network of friends in the trading world.
He goes through a number of mentors until he finds one to his liking and begins to work with him extensively.
Above all else he begins to watch the market and immerse himself in it.
He practices and begins to identify and systematically eliminate his bad trading habits.
As you might guess, while still no guarantee of success, this man’s path puts him in a much better position to succeed.
Why That 95% Failure Rate of New Day Traders Is Just Wrong
Now suppose for the sake of supposing that new traders like those in the first group [the ill prepared] make up 90 of a group of 100 new traders (90%) while those like the latter studious lad make up the remaining 10 (obviously the remaining 10%).
Suppose further that of the first group exactly 0 (read zero) survive the first 6 months of day trading. And only 5 of the latter 10 survive their first 6 months.
Combined, that of course yields the commonly cited 95% failure rate, so everyone can congratulate the 5 survivors (while secretly wondering if they have inside information) and go home right?
Not so fast young man…
Think of it this way…
The 90 from the first group were fortunate enough to get involved with the securities markets in the first place. With no preparation, no mentor, and no practice, a 100% failure rate of these wannabe day traders is virtually guaranteed. The only variance? How long it takes them to destroy an account.
Now for that remaining 10%…
To be clear, there’s certainly no guarantee that “doing all the right things” will lead to fabulous profits. In fact, doing everything correctly, but failing to make the proper mental transition will lead to modest (if any) returns. Thus our assignment of a 50% chance of success to this group of 10… i.e., 5 of the 10.
So these assumed numbers pretty much make the naysayers point yes?
Have you learned nothing dear reader?
Here’s the thing… the original 90 should never have been part of the sample under consideration…
They should never have taken those initial steps into the financial markets in the first place. They were dangerous from the word go and shouldn’t have been allowed to play with sharp objects… much less wield a mouse.
It’s kind of like the failure rate of new businesses.
When looked at in the aggregate, the quick demise of most new businesses might lead one to conclude that the chances of succeeding with a new enterprise are exceedingly slim.
However, when you reduce those under consideration to the well prepared, disciplined entrepreneurs who have identified and investigated a potentially profitable niche, put into place a well-developed, thoughtful plan and proceeded to focus on flawless execution of said plan, then the chances of success rise significantly.
So too day trading.
If you only consider the well prepared 10 of the original 100 would-be traders, you get the much more reasonable 50% success rate which is as good a chance as flipping a coin… and a full 45% better than the purported probability.
The Second Leg Of The 95% Failure Rate Of New Day Traders
Another contributor to the supposed 95% failure rate of new traders is the volume difference between those who succeed and those who fail.
More simply, those who find success tend to forge ahead quietly while generating superior returns via their hard won process…
And those who crash and burn? Let’s just say that many of those go on to deride day trading as impossible… as fool’s gold at best. And they do so loudly.
Surely you’ve seen the articles. They usually recount the author’s “experience” with day trading… whether independently or through a failed hedge fund or the like. The author will try to show their “objectivity” by declaring how they “worked hard” at it or how they “really tried to give it a fair shot.”
However, if you read the articles closely, you’ll invariably come across the real culprit.
The author will admit that they got bored and stepped outside their process.
Or that they weren’t satisfied with their results and felt “compelled” to take additional trades.
Or that they took an inordinate number of trades instead of exercising superior patience and waiting for the most optimal circumstances to present.
And so on, and so on…
Here’s the rub… Day trading is undeniably possible… and profitable… for the right people.
And everyone else will do well to give it a wide berth… Translation, treat it like a sharp object… and stay away.
What Now? Investigate For Yourself
So the next time you hear some wannabe railing against short term trading as an impossible undertaking or, more specifically, against the failure rate of new day traders, remember… a fool and money have no business getting together… and anyone who expects a successful outcome of such a pairing is an even bigger fool.
Yeah, I said it…