Terrance Odean is an academic and university professor quite popular in the stock market communities by his studies related to the profitability of trading and investing in general.
One of his most famous works was about Taiwan Stock Market, one of the most traded in the World.
We know that Chinese love betting.
In Spain Chinese are well known for being in the slot saloons trying to outsmart the machines.
There is a myth that says they win there but I have my doubts.
The slot machines are made to win in the long run.
Anyway, the studied concerning here is about the Taiwanese Stock Market from 1992 and 2006.
As a curious data, 17% of the total volume traded in that market was done by individual day traders.
Can you win doing day trading?
Approximately 450000 traders were analyzed in that period.
In an average year, 277000 traders would trade the intraday market. From those, only 20% would win by the end of the year after tax and commissions.
The problem is that this data is for one year.
The real important thing is to know how many of that 20% remained winners the second year.
The result is quite disappointing, only 1% remained profitable the year after.
Logically it should have been 4% of them. However for some reason the number decreased dramatically.
What I could not see in the study is how many accounts kept winning after three, four or five years.
I bet not many
Regarding the study, the consistent winners had a superior ability when there were company announcements where volatility is bigger.
Also these winners tended to do more in smaller companies, those less traded.
Another curiosity is that the most profitable traders used to concentrate in just a few stocks, where by some reason they did well.
Who knows if those “talented traders” had some sort of privileged information or just luck?
On the other hand, the study did not find any significant advantage in passive trading, that is to say those who try to benefit from limit orders in the market, trying to do some sort of market making, activity that happens to be the one done by the dealers and brokers, those who really win.
I do not know if the study included only individual traders or also prop trading firms.
Another thing that the study says is that the small group of successful traders did short selling.
The final conclusion of the study is that trading, especially intraday, is harmful for the long-term success of your financial health.
Not many of the 1% of successful traders is a winner after two years.
The rest, those who lost, did in a big way.
Besides, I am sure that the majority of those who win will find it very difficult to beat the market in the long-run and be able to win a 12% average return.
Day trading profitability
Another fact to count on is the fact that this study was taken in a market with no leverage, or at least not a big one.
Perhaps 2:1 at most.
If people lose in a market like this, what would happen in those markets with 100, 500 or 1000 leverage?
In general, and as Odean discovered, the more traders you do the bigger will be the probability of having worse outcome.
The spread and the trading commissions will eat you alive.
Anyhow, good luck for those who try.