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If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emoti

If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Of course, markets are not random and most untrained humans have emotional biases that actively optimize for losing money in markets. This is likely a controversial opinion: 90% of the time, someone who wants to break out of the "rat race" or achieve wealth for some future vision should go the startup route, or if the wealth part is not as important, do freelance/consulting. However, I believe there are 10% of people where trading the markets provide the better way to achieve the same goal. The reason being that for certain personality types (you need to be smart, disciplined, and creative to beat the market, and it still requires a lot of time), I suspect trading offers a higher expected value of return than starting a bootstrapped company. Startups, especially those not started by someone wealthy, have a higher failure rate than day traders. If you are not passionate about anything you can get funding for (would SpaceX have been successful if it were Elon's first company?), and you fit the criteria, trading is not as terrible an option as its reputation suggests.

jaredtn 6y ago
Two counterarguments: 1) Trading fees. If the house takes a cut of 0.1% on every transaction, then on average those who trade more lose more money. 2) Risk/reward tradeoff. If you buy deep out-of-the-money options, you might have a 5% chance of profitability, but expected return of $0 (neither positive nor negative). 95% of the time you lose $X, and 5% of the time you make $19X. If traders are pursuing riskier strategies, you'd expect most of them to lose money.
- lend000 6y ago
  Trading fees are a valid counterargument here, and while they are non-negligible (especially back when the "90% of day traders lose money" rule was established), I don't think they account for the full 40%. For point 2, if there is an expected return of 0, then on average this should push the portfolio toward 50% chance of profitability. It is the psychological factors combined with a non-random market that ensure most traders lock in losses (usually after riding them too long or not long enough).
  - jaredtn 6y ago
    If I roll a 100-sided dice that pays me $99 if I roll a 1 and -$1 if I roll 2-100, then my expected value is $0, but my chance of profitability is 1%.
    - bugzz 6y ago
      He's saying that traders don't just make 1 bet in their lifetimes though.
      - jaredtn 6y ago
        True, but you have to account for the chance of ruin. Once you go broke, you have to stop betting. Many traders will continue betting larger and larger amounts of money when they win, but stop betting if they lose big. Making risky bets is quite likely to make you go broke, especially if you scale the size of your bets with the size of your bankroll. The [Kelly Criterion](https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion) is the best way to approach it.
- grafs50 6y ago
  Also, the average at-home trader probably doesn't sell at a random point in time. They are probably more likely to sell after a loss.
  - lend000 6y ago
    It's often the opposite which is responsible for poor trading performance, due to the fundamental anomaly of markets: trends. Poor traders don't let winners ride and let losers ride to get above their break-even point, which often results in huge losses betting against the trend.
- csomar 6y ago
  > Trading fees. If the house takes a cut of 0.1% on every transaction, then on average those who trade more lose more money. If you trade derivatives, fees can be very low (because these are highly-leveraged products but if you are smart you know you shouldn't take any leverage). This can save substantial money if you trade frequently. > Risk/reward tradeoff. If you buy deep out-of-the-money options, you might have a 5% chance of profitability, but expected return of $0 (neither positive nor negative). 95% of the time you lose $X, and 5% of the time you make $19X. If traders are pursuing riskier strategies, you'd expect most of them to lose money. There is more to trading than predicting the direction of a stock/currency. You can provide liquidity and arbitrage a stock and its derivatives. Having traded for a while, arbitrage opportunities do exist; though sometimes you might have to be patient and cut off trading until an opportunity arise. This can be quite a time (like a year with no trading opportunity) and will require a lot of self-control.
H8crilA 6y ago
This is not why the 90/50 contrast exists. It exist due to "absorption barriers", due to the ergodicity of the process - betting too big and hitting "uncle points". It's a bias present in most people, especially otherwise intelligent people: not understanding that there is a huge difference between expected value and ergodic properties. Between expected returns and risk. Just look up what VaR is, the concept is ridiculous, yet so widely used. How much should the win (5/6) value be in a game of Russian roulette for you to play the game? The answer is that for most people it is not any number, that value doesn't exist.
- im3w1l 6y ago
  Don't underestimate how many people are on the brink of suicide anyway, and where a 1/6 chance of the good life seems like a good deal. Oh wait 5/6. Well that just makes it even better.
- alasdair_ 6y ago
  >not understanding that there is a huge difference between expected value and ergodic properties Can you expand on this? Are you claiming that the stock market is ergodic, or that it is not?
  - H8crilA 6y ago
    This applies much mote to actors within a securities market (both investors and issuers), not necessarily to this or that market itself. Most people's behavior is non ergodic. Though I suppose even if you broaden "the market" even to all of civilization - it is also non-ergodic, at least since nukes and hydrogen bombs were created.
  - TrinaryWorksToo 6y ago
    Read Nassim Taleb's essays. https://medium.com/incerto/the-logic-of-risk-taking-107bf41029d3 https://medium.com/incerto/the-logic-of-risk-taking-107bf410...
- jaredtn 6y ago
  Great point! The "uncle point" is a great phrase I hadn't known before.
champagneben 6y ago
>If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Only if the humans were making decision to buy and sell randomly.
- lend000 6y ago
  Intuitively, I don't think this is necessarily true. It probably depends on the type of random distribution for price movements.
  - Nasrudith 6y ago
    More the magnitude of randomness in the total vs "ordered" growth. A truly random stock market would imply an utterly insane economy (avoiding the obvious jokes for now). A company with good current and future prospects that everyone knows going down over time continually while a doomed one rises? One at a time maybe from "glitches" or extreme circumstances. Like say a massive need for short term funds and more ending shorting than available shares to cover it and a margin call chain for the latter. Both at once? Likely impossible even with extremely weird economic circumstances which make the COVID-19 economy look perfectly normal.
notahacker 6y ago
> I suspect trading offers a higher expected value of return than starting a bootstrapped company. Startups, especially those not started by someone wealthy, have a higher failure rate than day traders This seems highly unlikely Sure, there are people that have the skillset and capital to earn a living from day trading that don't have the skillset or interest in running a business who'll be better off trading. But successful businesses selling products or services can consistently earn very large multiples of their initial investment, and day traders can't. Short term financial bets are much closer to a zero sum game than starting businesses. And we've already established that 90% of day traders fail, just like startup businesses. More than 90% since the criteria in this study is beat the index, not earn a living.
- Bubbadoo 6y ago
  As a day trader, you are always one trade away from losing it all.Even if you're diversified, one major loss can be devastating.
chrischattin 6y ago
This is absolutely right. I'm handily beating the market with an automated strategy I designed to the point I've all but shut down my startup/programming consulting business. What the system trades, and what I understand intellectually is the right thing to do, is often very hard to stomach emotionally.
- rsp1984 6y ago
  May I ask how you got started? What is the tech stack you are using today? Any resources you can recommend?
  - chrischattin 6y ago
    Sure. I graduated with a business degree (b.s. in management, specifically) and just kept on learning everything I could get my hands on about finance, valuing derivatives, human behavior and biases, etc, on the side through a couple of different careers. I used to bring Buffett's shareholder letters on trips when I was a pilot, for example. I've been a big nerd about this stuff for a long time and the strategy I built is the culmination of knowledge from a wide range of experiences and studying all fitted to my personality and goals. Tech stack: I love Ruby, but use Python and a custom language that interfaces with the broker I'm using for execution. More and more decent broker API's are starting to pop up out there. So, you can likely use whatever you're most comfortable with. Alpaca has a decent web API, for example. I honestly wouldn't recommend getting into it, though, unless you really enjoy geeking out over this stuff and have a decent breadth of knowledge to find your edge. You're also competing against some brilliant PhD types who are just as obsessed and hard working as you. My stuff works in part because it's taking advantage of some things that are too small for the big boys to pay attention to.
- bugzz 6y ago
  What platform do you trade on?
  - TuringNYC 6y ago
    Interactive Brokers. They have an API. I started 10yrs ago back when they were the only player in the market to offer $1 trades. Making money is hard though, and probably not worth the effort if you account for your time. But it was a lot of fun and I learned a lot. I imagine if I did it full time, I could be more successful.
starpilot 6y ago
If markets were truly random, I'd expect (approaching) 100% of day traders to lose money (or gain 0), because the expected value is 0. It's like betting on a coin flip. Since we're at 90%, it's pretty close.
- bugzz 6y ago
  Huh? Doesn't your argument also mean that you'd expect nearly 100% to make money, or lose 0?
hogFeast 6y ago
Yep, that is a fairly common misunderstanding that the general public makes (and ends up with: if I just take the opposite decision then I will make money). The main reason why 90% lose money is costs. That is it. Most people probably are optimised for losing money but the main issue is really costs/overtrading. But related to this, most people believe that edge on profitable trades is very large...but in most markets, institutional-grade costs will still be a big chunk of your edge i.e. costs matter hugely.
- Bubbadoo 6y ago
  Costs? as in commissions? I haven't paid a commission in two years. Many brokers are now commission-free.
  - clairity 6y ago
    if it's commission free, it's likely because (1) fees are baked into the quoted price, or (2) firms are buffering trades with their own holdings and making money on traders' losses. you're paying somewhere for sure.
    - TuringNYC 6y ago
      Sort of. The fees are baked into quoted price ("the spread") but the execution cannot be worst than the NBBO (National Best Bid Offer). They are making money on the spread for sure, probably crossing some trades internally as well. They also make money on the margin rates.
      - rmrfstar 6y ago
        Yeah, but the NBBO moves. You don't think it's at all strange that 80% of share volume coming out of Robinhood is sold off to broker-dealers attached to large systematic hedge funds? I'm sure you could think of a thing or two to do with terabytes of retail trade logs and behavioral advertising data.
        6y ago
tlb 6y ago
And it's not even that day traders' decisions are wrong. It's just that they're predictable in advance by HFTs who can act on news stories within milliseconds, so they're always buying after the uptick and selling after the downtick.
- Nasrudith 6y ago
  If they keep losing they are wrong or at least playing the wrong game in trying to play John Henry with a computer in fluctuations. They need to compete like a human - using their pattern matching skills and reason on the fundamentals. Algorithmic traders that attempt sentiment analysis get fooled into doing things like buying Nintendo stock because female Bowser art was trending.
fredophile 6y ago
A lot of day traders use leverage. As a result any sufficienty large downward move will result in a margin call and they have to take the loss. Being correct about the overall direction but having bad timing is the same as being wrong.

jaredtn 6y ago

Two counterarguments: 1) Trading fees. If the house takes a cut of 0.1% on every transaction, then on average those who trade more lose more money. 2) Risk/reward tradeoff. If you buy deep out-of-the-money options, you might have a 5% chance of profitability, but expected return of $0 (neither positive nor negative). 95% of the time you lose $X, and 5% of the time you make $19X. If traders are pursuing riskier strategies, you'd expect most of them to lose money.

lend000 6y ago
Trading fees are a valid counterargument here, and while they are non-negligible (especially back when the "90% of day traders lose money" rule was established), I don't think they account for the full 40%. For point 2, if there is an expected return of 0, then on average this should push the portfolio toward 50% chance of profitability. It is the psychological factors combined with a non-random market that ensure most traders lock in losses (usually after riding them too long or not long enough).
- jaredtn 6y ago
  If I roll a 100-sided dice that pays me $99 if I roll a 1 and -$1 if I roll 2-100, then my expected value is $0, but my chance of profitability is 1%.
  - bugzz 6y ago
    He's saying that traders don't just make 1 bet in their lifetimes though.
    - jaredtn 6y ago
      True, but you have to account for the chance of ruin. Once you go broke, you have to stop betting. Many traders will continue betting larger and larger amounts of money when they win, but stop betting if they lose big. Making risky bets is quite likely to make you go broke, especially if you scale the size of your bets with the size of your bankroll. The [Kelly Criterion](https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion) is the best way to approach it.
grafs50 6y ago
Also, the average at-home trader probably doesn't sell at a random point in time. They are probably more likely to sell after a loss.
- lend000 6y ago
  It's often the opposite which is responsible for poor trading performance, due to the fundamental anomaly of markets: trends. Poor traders don't let winners ride and let losers ride to get above their break-even point, which often results in huge losses betting against the trend.
csomar 6y ago
> Trading fees. If the house takes a cut of 0.1% on every transaction, then on average those who trade more lose more money. If you trade derivatives, fees can be very low (because these are highly-leveraged products but if you are smart you know you shouldn't take any leverage). This can save substantial money if you trade frequently. > Risk/reward tradeoff. If you buy deep out-of-the-money options, you might have a 5% chance of profitability, but expected return of $0 (neither positive nor negative). 95% of the time you lose $X, and 5% of the time you make $19X. If traders are pursuing riskier strategies, you'd expect most of them to lose money. There is more to trading than predicting the direction of a stock/currency. You can provide liquidity and arbitrage a stock and its derivatives. Having traded for a while, arbitrage opportunities do exist; though sometimes you might have to be patient and cut off trading until an opportunity arise. This can be quite a time (like a year with no trading opportunity) and will require a lot of self-control.

H8crilA 6y ago

This is not why the 90/50 contrast exists. It exist due to "absorption barriers", due to the ergodicity of the process - betting too big and hitting "uncle points". It's a bias present in most people, especially otherwise intelligent people: not understanding that there is a huge difference between expected value and ergodic properties. Between expected returns and risk. Just look up what VaR is, the concept is ridiculous, yet so widely used. How much should the win (5/6) value be in a game of Russian roulette for you to play the game? The answer is that for most people it is not any number, that value doesn't exist.

im3w1l 6y ago
Don't underestimate how many people are on the brink of suicide anyway, and where a 1/6 chance of the good life seems like a good deal. Oh wait 5/6. Well that just makes it even better.
alasdair_ 6y ago
>not understanding that there is a huge difference between expected value and ergodic properties Can you expand on this? Are you claiming that the stock market is ergodic, or that it is not?
- H8crilA 6y ago
  This applies much mote to actors within a securities market (both investors and issuers), not necessarily to this or that market itself. Most people's behavior is non ergodic. Though I suppose even if you broaden "the market" even to all of civilization - it is also non-ergodic, at least since nukes and hydrogen bombs were created.
- TrinaryWorksToo 6y ago
  Read Nassim Taleb's essays. https://medium.com/incerto/the-logic-of-risk-taking-107bf41029d3 https://medium.com/incerto/the-logic-of-risk-taking-107bf410...
jaredtn 6y ago
Great point! The "uncle point" is a great phrase I hadn't known before.

champagneben 6y ago

>If markets were truly random, you might expect 50% of day traders to lose money, not 90%. Only if the humans were making decision to buy and sell randomly.

lend000 6y ago
Intuitively, I don't think this is necessarily true. It probably depends on the type of random distribution for price movements.
- Nasrudith 6y ago
  More the magnitude of randomness in the total vs "ordered" growth. A truly random stock market would imply an utterly insane economy (avoiding the obvious jokes for now). A company with good current and future prospects that everyone knows going down over time continually while a doomed one rises? One at a time maybe from "glitches" or extreme circumstances. Like say a massive need for short term funds and more ending shorting than available shares to cover it and a margin call chain for the latter. Both at once? Likely impossible even with extremely weird economic circumstances which make the COVID-19 economy look perfectly normal.

notahacker 6y ago

> I suspect trading offers a higher expected value of return than starting a bootstrapped company. Startups, especially those not started by someone wealthy, have a higher failure rate than day traders This seems highly unlikely Sure, there are people that have the skillset and capital to earn a living from day trading that don't have the skillset or interest in running a business who'll be better off trading. But successful businesses selling products or services can consistently earn very large multiples of their initial investment, and day traders can't. Short term financial bets are much closer to a zero sum game than starting businesses. And we've already established that 90% of day traders fail, just like startup businesses. More than 90% since the criteria in this study is beat the index, not earn a living.

Bubbadoo 6y ago
As a day trader, you are always one trade away from losing it all.Even if you're diversified, one major loss can be devastating.

chrischattin 6y ago

This is absolutely right. I'm handily beating the market with an automated strategy I designed to the point I've all but shut down my startup/programming consulting business. What the system trades, and what I understand intellectually is the right thing to do, is often very hard to stomach emotionally.

rsp1984 6y ago
May I ask how you got started? What is the tech stack you are using today? Any resources you can recommend?
- chrischattin 6y ago
  Sure. I graduated with a business degree (b.s. in management, specifically) and just kept on learning everything I could get my hands on about finance, valuing derivatives, human behavior and biases, etc, on the side through a couple of different careers. I used to bring Buffett's shareholder letters on trips when I was a pilot, for example. I've been a big nerd about this stuff for a long time and the strategy I built is the culmination of knowledge from a wide range of experiences and studying all fitted to my personality and goals. Tech stack: I love Ruby, but use Python and a custom language that interfaces with the broker I'm using for execution. More and more decent broker API's are starting to pop up out there. So, you can likely use whatever you're most comfortable with. Alpaca has a decent web API, for example. I honestly wouldn't recommend getting into it, though, unless you really enjoy geeking out over this stuff and have a decent breadth of knowledge to find your edge. You're also competing against some brilliant PhD types who are just as obsessed and hard working as you. My stuff works in part because it's taking advantage of some things that are too small for the big boys to pay attention to.
bugzz 6y ago
What platform do you trade on?
- TuringNYC 6y ago
  Interactive Brokers. They have an API. I started 10yrs ago back when they were the only player in the market to offer $1 trades. Making money is hard though, and probably not worth the effort if you account for your time. But it was a lot of fun and I learned a lot. I imagine if I did it full time, I could be more successful.

starpilot 6y ago

If markets were truly random, I'd expect (approaching) 100% of day traders to lose money (or gain 0), because the expected value is 0. It's like betting on a coin flip. Since we're at 90%, it's pretty close.

bugzz 6y ago
Huh? Doesn't your argument also mean that you'd expect nearly 100% to make money, or lose 0?

hogFeast 6y ago

Yep, that is a fairly common misunderstanding that the general public makes (and ends up with: if I just take the opposite decision then I will make money). The main reason why 90% lose money is costs. That is it. Most people probably are optimised for losing money but the main issue is really costs/overtrading. But related to this, most people believe that edge on profitable trades is very large...but in most markets, institutional-grade costs will still be a big chunk of your edge i.e. costs matter hugely.

Bubbadoo 6y ago
Costs? as in commissions? I haven't paid a commission in two years. Many brokers are now commission-free.
- clairity 6y ago
  if it's commission free, it's likely because (1) fees are baked into the quoted price, or (2) firms are buffering trades with their own holdings and making money on traders' losses. you're paying somewhere for sure.
  - TuringNYC 6y ago
    Sort of. The fees are baked into quoted price ("the spread") but the execution cannot be worst than the NBBO (National Best Bid Offer). They are making money on the spread for sure, probably crossing some trades internally as well. They also make money on the margin rates.
    - rmrfstar 6y ago
      Yeah, but the NBBO moves. You don't think it's at all strange that 80% of share volume coming out of Robinhood is sold off to broker-dealers attached to large systematic hedge funds? I'm sure you could think of a thing or two to do with terabytes of retail trade logs and behavioral advertising data.
      - 6y ago

tlb 6y ago

And it's not even that day traders' decisions are wrong. It's just that they're predictable in advance by HFTs who can act on news stories within milliseconds, so they're always buying after the uptick and selling after the downtick.

Nasrudith 6y ago
If they keep losing they are wrong or at least playing the wrong game in trying to play John Henry with a computer in fluctuations. They need to compete like a human - using their pattern matching skills and reason on the fundamentals. Algorithmic traders that attempt sentiment analysis get fooled into doing things like buying Nintendo stock because female Bowser art was trending.

fredophile 6y ago

A lot of day traders use leverage. As a result any sufficienty large downward move will result in a margin call and they have to take the loss. Being correct about the overall direction but having bad timing is the same as being wrong.