The Three Most Popular Day Trading Studies (and What They Mean for Your Strategy)
Why do 80% of day traders lose money? Day traders have terrible track records. In recent months, many day traders lost money due to the volatile stock market and other reasons.
That’s why day traders have been the subject of numerous studies over the years.
There are many trading strategies, and there are just as many studies out there on the best way to day-trade. But which ones should you trust? And more importantly, how do you know if a strategy is right for you?
Today, we’re going to the library.
This lesson highlights three of the most popular studies that address why 80% of day traders lose money. We will then follow up with some useful solutions that you can apply in just a few days to help you day trade, successfully, and avoid losing money.
In 2006, Brad Barber and Terrance Odean (who is often cited as one of the world’s top academics in behavioral finance) published a research paper that looked at the performance of 66,465 households over a six-year period.
The study found that most traders and investors underperform a buy-and-hold strategy.
In fact, the authors found that only about 20% of all investors were able to beat the market on a consistent basis. Households that traded the most (an average of 414 times over the six-year period) underperformed households that traded the least (an average of just once over the six-year period) by a whopping 18%.
Does Gender Play a Role?
While there are a number of reasons why individual investors underperform the market, one of the most important is that when they start trading, they trade too much. But it also may have something to do with gender.
In their study, Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment, Barber and Odean found that men trade 45 percent more than women and earn annual risk-adjusted net returns that are 1.4 percent less than those earned by women. These differences are more pronounced between single men and single women; single men trade 67 percent more than single women and earn annual risk-adjusted net returns that are 2.3 percent less than those earned by single women.
This is just one (actually two) of many studies that have shown that day traders, as a group, tend to underperform the market.
Another popular study comes from H. Nejat Seyhun, who looked at the performance of individual investors in Taiwan from 1991 to 1996.
H. Nejat Seyhun is a professor of finance at the University of Michigan, and he’s often cited as one of the world’s top academics in behavioral finance.
Nejat’s research activity focuses on backdating of executive options, the risk-return trade-off in asset prices, intraday impact of insider trading, long-run performance of IPOs, managerial overconfidence, and conflicts of interest in securities firms, and option pricing. That’s a lot, right?
Seyhun found that individual investors who traded the most (an average of 208 times over the five-year period) underperformed the market by a whopping 13.36% per year. [explain]
The cons of over-trading are pretty clear: it puts unnecessary stress on your mind and body, it can lead to bad decision-making, and worst of all, it can deplete your account quickly.
Seyhun’s study is often cited as evidence that day traders, as a group, underperform the market.
And finally, there’s a study by Amit Goyal and Sunil Wahal, which looked at the performance of individual investors in India from 1996 to 2006.
This research study also found that the more individual investors traded, the worse their performance was.
In fact, the authors found that “the probability of an investor beating the market decreases monotonically with trading activity.”
More Reasons 80% of Day Traders Lose Money + Solutions
So, why do most investors and new traders overtrade and lose money? According to many scholars and professional traders, it may have to do with poor training, poor planning due to FOMO, etc., and overly complicated day trading activity.
The importance of good training in day trading can’t be overstated.
Unfortunately, not all day trading training is created equal. Some of it is great, and some of it is nothing more than snake oil. It is critical that day traders learn the details of asset types, basic technical analysis, price action, risk management, and money management.
FOMO, Greed, and Herd Mentality
Surprise! We have a few more studies for you.
The three most popular day trading studies are the Fear of Missing Out study, the Greed study, and the Herding study. Each of these studies has important implications for your day trading strategy.
The Fear of Missing Out Study
The FOMO study showed that traders are more likely to take risks when they believe that others are making money. This means that you should be careful of following the crowd when day trading.
The Greed Study
The greed study showed that traders are more likely to take risks when they believe that they can make a lot of money. This means that you should be careful of taking too much risk in your day trading.
The Herding Study
The herding study showed that traders are more likely to follow the crowd when they believe that others are doing the same. This means that you should be careful of following the crowd when day trading.
All three of these studies suggest that you should be careful of taking too much risk in your day trading. You should always be aware of your own emotions and what is driving your decisions. Remember, it is important to have a plan and stick to it. Do not let your emotions get the best of you when day trading.
Doing Way Too Much
An over-complicated trading strategy is often more trouble than it’s worth. You’re probably better off following one or two simple day trading strategies instead.
So, simplify your trade, master one method, and be good at it. Keep this in mind: it’s better to master well and profit from 2/3 strategies than to use 10 and lose as much (or more) as you gain. The more strategies you use at once, the more complicated it is to manage them.
The Bottom Line
It’s worth noting that when it comes to day trading, the evidence is clear: the vast majority of day traders lose money.
There are a number of reasons for this, but one of the most important is that they trade too much.
If you want to be among the successful professional traders, you need to be aware of this and make sure that you trade less than the average day trader.
This doesn’t mean that you can’t make money day trading. But it does mean that you need to be careful and make sure that you have a solid plan before you start trading.
Summary: Why 80% of Day Traders Lose Money?
This lesson explains why 80% of day traders fail. By highlighting three popular studies, we have learned that when it comes to day trading, the odds are definitely not in your favor. But if you have a solid strategy and are comfortable taking on risks, you could be one of the few that succeed.
Just be aware of the studies that show how easy it is to trade too much and end up underperforming the market. Also, just because a study says that being aggressive is the best way to trade doesn’t mean that you should start taking reckless trades just for the sake of it.
You still need to have a solid strategy and risk management plan in place, or you’ll likely end up losing money. If you can avoid those pitfalls, you might have a chance of becoming a successful day trader.
So, what does all this mean for your day trading strategy? If you find yourself trading too much, it might be time to reevaluate your strategy.
Maurice Kenny can show you how to not be one of the 80% of traders who loses money.
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, options trading methods, and trading courses. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”