Linked below you’ll find the faulty paper often referenced as incontrovertible proof by articles like this one that north of 90% of day traders fail.
- That’s NOT what the paper says
- “Finally, we investigate the characteristics of profitable day traders. Past performance (either returns or dollar profits) is, by a large margin, the best predictor of future performance. In addition, experience, past day trading volume, the willingness to short, and the concentration of trading in a few stocks all predict future profitability of day traders.”
- The technique used in the study would be faulty at best for determining day trading success
- “The day trading return includes both round-trip and one-sided trades (i.e., trades that result in an open position at the close of trading). The remaining portfolio return includes the returns to all positions that remain open after the day of trade. Thus, we completely and accurately account for all gains and losses earned by day traders.”
- “It is important to include both round-trip and one-sided trades to measure the performance of day trading. Focusing only on round-trip trades would yield a biased measure of performance if investors sell winners and hold losers (i.e., exhibit the disposition effect). For example, assume some day traders randomly buy and sell (random traders), while others close only winning investments while riding losers (disposition traders). Were we to analyze only the profits of round-trip trades, it is clear that the disposition traders would have better round-trip returns than the random traders merely because they have a rule regarding when to close a position. Since the disposition effect is prevalent among Taiwanese investors and among day traders elsewhere, 5 it is important to include both round-trip and other trades when analyzing performance. “
- The market examined is the Taiwan stock market… again, not exactly comparable to the United States equity markets.
At any rate, have a look for yourself… I think you’ll agree with me.
The Cross-Section of Speculator Skill Evidence from Day Trading
Brad M. Barber et al
We document economically large differences in the before- and after-fee returns earned
by speculative traders. We establish this result by focusing on day traders in Taiwan
from 1992 to 2006. We argue that these traders are almost certainly speculative traders
given their short holding period. We sort day traders based on their returns in year y and
analyze their subsequent day trading performance in year y+1; the 500 top-ranked day
traders go on to earn daily before-fee (after-fee) returns of 49.5 (28.1) bps per day;
bottom-ranked day traders go on to earn daily before-fee (after-fee) returns of -17.5
(-34.2) bps per day. The spread in returns between top-ranked and bottom-ranked
speculators exceeds 60 bps per day. Our results contribute to the evidence that crosssectional variation in investor skill is an important feature of financial markets.
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