Most Day Traders Lose Money: Why Trading Options May Be a Good Solution
According to “Barber, Lee, Odean (2010): Do Day Traders Rationally Learn About Their Ability?” most traders lose money, and in particular:
- 80% of all day traders quit within the first two years
- Among all day traders, nearly 40% day trade for only one month.
- Within three years, only 13% continue to day trade.
- And after five years, only 7% remain.
- Only about 1% of all day traders are able to predictably profit net of fees.
Traders with up to a 10 years negative track record continue to trade. This suggests that day traders even continue to trade when they receive a negative signal regarding their ability.
In another research, Barber, & Odean (2000): Trading is hazardous to your wealth: The common stock investment performance of individual investors:
- The average individual investor underperforms a market index by 1.5% per year.
- Active traders underperform by 6.5% annually.
Abstract
“Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent. The average household earned an annual return of 16.4 percent, tilted its common stock investment toward high-beta, small, value stocks, and turned over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.”
Another study, “Active Trading and (Poor) Performance – Policy Research Working Paper 8767
The Social Transmission Channel Laura Escobar Alvaro Pedraza” says that “Active investors often generate inferior returns”
Abstract
“Active investors often generate inferior returns. Social interactions might exacerbate this tendency, but the causal link between peer effects and active trading is difficult to identify empirically. This paper exploits the exogenous assignment of students to classrooms in a large-scale financial education initiative to evaluate the transmission of trading strategies among individual investors. The paper shows that students assigned to groups where classmates have more trading background, are more likely to start trading after completing the program. These social effects are stronger when peers have experienced favorable outcomes. The paper documents a negative consequence from social interactions: students that registered for courses where peer returns are large, generate lower trading profits than other investors. The evidence is consistent with social learning under biased information— people share their most successful experiences, encouraging stock trading among uninformed investors. The results shed light on the role of selective communication in the transmission and adoption of ideas, and more importantly, in the behavior of people expose to biased information. The findings show that social learning can lead to misguided decisions when peer choices are not accurately observed by members of the social network.”
Option trading is not day trading
Trading in options is usually a trading tecnique spanning a certain number of days or weeks, even months.
What is even more interesting in option trading is the possibility to adjust the trading according to the price development of the underlying security.
Adjustments in options trading represent one of the most interesting features, if not the most interesting, because it allows you to reduce losses in the losing trades.
You want to run the winning trades and to maximise the profit, and to adjust the losing trades to limit the loss by 30%, 40% and even 50% or more, and this is something that eventually pays off.
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