Herenya Capital Advisors Petri Redelinghuys // @TraderPetri // www.herenya.co.za
The realities of trading
The realities of trading On 19 August 2019, a research paper was published entitled “Day trading for a living?” The authors; Fernando Chague, Rodrigo De-Losso and Bruno Giovannetti conducted a statistical study that found it is virtually impossible to make money day trading. Abstract: We show that it is virtually impossible for an individual to day trade for a living, contrary to what course providers claim. We observe all individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world, and persisted for at least 300 days: 97% of them lost money, only 0.4% earned more than a bank teller (US$54 per day), and the top individual earned only US$310 per day with great risk (a standard deviation of US$2,560). Additionally, we find no evidence of learning by day trading.
The research
The realities of trading – the research • Overall, the message is clear. Day trading is Definition of day trading: difficult, but with enough training and hard work, • Day trading is the activity of buying and selling anyone can do it successfully. the same financial asset on the same day in the The reality: same quantity. • There is no quality information about the actual The message communicated by the market: odds individuals face when they decide to day • According to a 2017 Forbes article, “day trading trade for a living (until this research paper was is the new sexy that gets an inordinate amount of released). hype.” • Day traders now face more fierce competition • Investopedia says “Trading is often viewed as a than ever before from algorithms and high- high barrier-to-entry field, but this is simply not frequency traders (HFTs). the case in today’s market. Now, anyone with • There are very few studies that follow new ambition and patience can trade, and do it for a traders with the aim of finding evidence of living, even with little to no money. Sounds learning. fantastic? It is, and there are so many options available to people with the desire to put in the time to learn.”
The realities of trading – the research Purpose of the study: The Empirical analysis: • • To inform individuals who are considering day Observe daily trading records of anonymous traders from 2012 to 2017. trading as a viable career. • For each day in the period they observed; • Follow individuals who day traded “mini-Ibovespa” • Investor type (individual or institutional) futures contracts for their first time between 2013 • Number of contracts traded (bought and sold) and 2015 to track performance and success rate. • Number of total deals for each day (individual trade executions) Method used: • Only individual traders that started trading for the first time ever during this period and traded an equal number of • contracts each day were evaluated over a minimum of two Statistical analysis of a dataset provided by the years. Brazilian SEC. • A total of 19,646 traders were identified as new traders • Mini-Ibovespa futures were used because it is the during this period (the 53,246 traders who started in 2016 preferred asset / trading instrument among day and 2017 were excluded as there would not be at least two traders in Brazil and is the third most traded equity years of data to evaluate performance). index futures contract in the world.
The realities of trading – the research The Empirical analysis: The disposition affect: The disposition effect is an anomaly discovered in • • Performance calculation is made by taking the average across each trader’s daily profits (total volume sold minus behavioural finance. It relates to the tendency of total volume purchased each day) and subtracting the investors to sell assets that have increased in value, transaction fees / brokerage paid each day. while keeping assets that have dropped in value. • All values are computed in US Dollars, using the average Hersh Shefrin and Meir Statman identified and named • R$/US$ exchange rate of the sample period. the effect in their 1985 paper, which found that people • Results likely to be over-estimated since; dislike losing significantly more than they enjoy winning. • Income taxes were not considered, The disposition effect has been described as "[o]ne of • Other costs were not considered like, trading the most robust facts about the trading of individual platforms and fixed costs, courses, etc. • investors" because investors will hold stocks that have Only days in which the individual purchases and sales were exactly equal were considered (according lost value yet sell stocks that have gained value.” to Linnainmaa (2005), retail traders are reluctant to close losing day trades due to the disposition effect).
The results
The realities of trading – the results How many days did the traders keep trading? 25 000 19 646 20 000 15 000 10 000 5 000 0 Traders that started out
The realities of trading – the results How many days did the traders keep trading? 25 000 19 646 20 000 15 000 10 000 5 000 1 111 0 Traders that started out 1 day
The realities of trading – the results How many days did the traders keep trading? 25 000 19 646 20 000 15 000 9 978 10 000 5 000 1 111 0 Traders that started out 1 day 2 to 50 days
The realities of trading – the results How many days did the traders keep trading? 25 000 19 646 20 000 15 000 9 978 10 000 3 100 5 000 1 111 0 Traders that 1 day 2 to 50 days 51 to 100 days started out
The realities of trading – the results How many days did the traders keep trading? 25 000 19 646 20 000 15 000 9 978 10 000 3 100 2 738 5 000 1 111 0 Traders that 1 day 2 to 50 days 51 to 100 days 101 to 200 started out days
The realities of trading – the results How many days did the traders keep trading? 25 000 19 646 20 000 15 000 9 978 10 000 3 100 2 738 1 168 5 000 1 111 0 Traders that 1 day 2 to 50 days 51 to 100 101 to 200 201 to 300 started out days days days
The realities of trading – the results How many days did the traders keep trading? 25 000 19 646 20 000 15 000 9 978 10 000 3 100 2 738 1 168 1 551 5 000 1 111 0 Traders 1 day 2 to 50 51 to 100 101 to 200 201 to 300 more than that days days days days 300 days started out
But how many made profit?
The realities of trading – the results
The realities of trading – the results How many traders actually made profit? 1 111 331 1 day 29.80% 9 978 2 to 50 days 1547 15.50% 3 100 51 to 100 days 276 8.90% 2 738 186 101 to 200 days 6.80% 1 168 201 to 300 days 63 5.40% 1 551 47 more than 300 days 3.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% number of traders meeting criteria net profitable traders over period #
The realities of trading – the results • This peculiar pattern is contrary to Put into perspective: 0.24% of all the traders (19 646) that started, traded for what self-selection - individuals who 300 days or more (2 years) and were persist in an activity are generally profitable. those with better performance and learning by doing - would suggest. • The probability of an individual • In turn, patterns like this are usually exhibiting a positive profit monotonically decreases with the found in gambling activities , such as number of days he or she trades. the casino roulette, where the proportion of successful players also monotonically decreases with the number of rounds played.
The realities of trading – the results How did the 3% of persistant traders fair? 0.5% of the total number made a net profit on average: 47 of traders “made it” more than $16 per day: 17 0.005% $310 average per day: 1 1.1% 0.5% Other Total: 1 551 more than $54 per day: 8 Total: 1 551 made a net profit on average: 47 more than $16 per day: 17 more than $54 per day: 8 $310 average per day: 1
The realities of trading – the results This figure shows the daily net profit average (horizontal axis) and the daily net profit standard deviation (vertical axis) of each one of the 47 day traders (3.0% of the 1 551 persistent day traders) who obtained positive net profit. The first dashed vertical line indicates the Brazilian minimum wage (US$ 16 per day) and the second, the initial salary of a bank teller (US$ 54 per day).
What it takes
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