If you were to scan the marketing materials of most retail brokers, it wouldn’t take long to find claims that trading can help you quit your day job and achieve financial freedom. Alternatively, they’ll say that trading is hard at first but, if you study enough, then you’ll start making money in the not so distant future.
A new study of day traders in Brazil has shown that this is almost certain to be total nonsense. Three academics, two from the Sao Paulo School of Economics and another from the University of Sao Paulo, undertook a comprehensive analysis of options and futures day traders in local equity markets.
The academics looked at just under 20,000 new traders and found that, over time, they lost more and more money. Of those that traded for a single day, roughly 30 percent turned a profit. Conversely, only 3 percent of the people that traded for over 300 days made any money.
In fact, the researchers found that the longer that someone traded, the more money they lost.
“This peculiar pattern [of declining profitability] is similar to what we would find, for instance, in the casino roulette, where the proportion of successful players also monotonically decreases with the number of rounds played,” said the academics.
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Better a bank clerk than a day trader
Going into some more detail with their findings, the trio found that, even if they were ‘profitable,’ the sums of money that people made from day trading were so minuscule that you couldn’t live off of them.
Of the long-term day traders, only 1 percent made more than the Brazilian minimum wage of $16. Less than half of that group of people made more than $54 a day, the salary of an average Brazilian bank clerk, with the highest earner averaging $310 a day.
Aside from suggesting that it is very, very unlikely that you will be able to make a living from day trading, the study also shows that, contrary to expectations, you don’t get better at trading over time, you get worse.
The researchers had suspected that the increasing presence of high-frequency trading firms would also be detrimental to traders’ success. But, though they found that this was the case, they controlled for the presence of HFTs and found no increase in traders’ profitability over time.