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Day Trading: A Good Way to Lose Money

All about investments, personal finance and well-being! But almost always based on academic research.

The time has come to analyze Day Trading (or any type of Trading in general) this is another of the investment alternatives that I presented in (The 4 pillars of any investment). If you've been in investing for a while, chances are you've probably tried some variation of trading (maybe you're doing it now). For those who do not know, Day Trading (or Trading in general) consists of buying and selling an asset in a short period of time (minutes, hours, days, weeks, etc), the main objective is to exceed the results of the market in the that you are investing. On the internet there are many paid and free courses to learn how to trade.

Most likely you have come across the countless advertisements on the internet about people who have achieved incredible returns and show off their incredibly expensive luxuries obtained thanks to "profits" from trading. As you can imagine, almost all of them (if not all) are fake, if you aspire to obtain this by trading, I can already tell you that you will be very disappointed. But what if you have a less ambitious perspective? What if your perspective is Day Trading or Trading with the goal of earning a steady but not exorbitant income? What if you know these ads are false, but you've been trading for a while and have gotten reasonably decent results? Well, let's analyze all that from the perspective of academic studies.

There is a large number of papers that have studied trading from all perspectives. Let's analyze the most important studies.

The paper “Just How Much Do Individuals Investors Lose by Trading” (Brad M, Terrance O, others; 2008) had access to the entire Taiwan database. The main conclusion was that, on average, individuals lose 3.8% per year due to poor trading decisions (market timing, commissions, taxes, etc). In turn, it was found that financial institutions benefit from the mistakes of individual traders. Have you ever thought about who day traders compete against?

It was also found that individual traders' biggest losses occur during aggressive trades. In the short term, the results of the traders seem to be determined by chance, while in the long term, the loss of the traders increases significantly.

So now we know that on average traders lose in the long run, but you are not average. How about you try hard and practice a lot? How about dominating the world of Day Trading? What does it matter if the average trader loses if you, who are more skilled, are seeing better results? Well, the paper "Day Trading for a Living?" (Fernando C, Rodrigo D, Bruno G; 2020) wanted to analyze this.

The paper analyzed the trading activity of CVM in Brazil from 2012 to 2017. Its objective was to analyze the level of profits of the best traders to analyze whether or not this activity is financially worthwhile.

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The main conclusion reached is that it is virtually impossible to make a living from trading. Only a tiny percentage of participants earn the equivalent of a bank account agent. And you know what? the paper did not consider transaction costs and taxes, so its results are strongly overestimated (this is raised in the same paper).

Another important conclusion is that the greater the number of operations (greater aggressiveness), the greater the average loss (same results as in the previous paper). Additionally (and this is important) the authors found no evidence of learning or skill in day traders who have been trading longer (trading longer does not make you a better trader).

Finally we have the paper “The Cross - Section of Speculator Skill: Evidence From Day Trading” (Brad M, Terrance O, others; 2013) which had the entire Taiwan trading database from 1992 to 2006. The objective was analyze the patterns, results and characteristics of those who carry out day trading.

The main conclusion is that the vast majority of traders lose money after costs (which is consistent with previous papers). However, something interesting was found here: A small group of traders make huge profits (could those be the ones with real talent? Unfortunately not). The authors found that the most successful traders make most of their profits in periods of information asymmetry, leading to the conclusion that these traders are using insider information (in particular, they were trading mainly in periods of important announcements).

Again, it was found that the more aggressive the Trading, the higher the average loss.


Let's see the main conclusions we have:

  • Day trading or any variant damages the heritage and wealth of those who practice it.
  • In the short term, the results are mainly determined by chance (for this reason, it is perfectly possible to obtain good results for months or even years). In the long run, the loss increases significantly.
  • The greater the number of trades per year, the greater the average loss.
  • The select group of successful traders was linked to the use of privileged information.
  • The group of the best traders earn a salary equivalent to a bank account agent in Brazil (but before transaction costs and taxes).
  • While individuals lose from trading, financial institutions win from the operations of these individuals.

As we can see, the academic literature points to the same conclusions, investing doing Day Trading or any type of Trading is a harmful practice for your capital (especially in the long term). At the end of the day, when you analyze the pure statistics, you will realize that those who win with day trading are the financial institutions (who win when individual traders lose) and those who sell trading courses.

I hope you find it useful and you liked this article a lot. Stay tuned as we will constantly be discussing more and more about the world of investments.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2022 Nicolas Hidalgo

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