Do Day Traders Beat the Stock Market?

Day traders generally do not beat the stock market.

In fact, the vast majority of day traders lose money over time.

In this article, we take a detailed look at the evidence.

Key Takeaways – Do Day Traders Beat the Stock Market?

• The vast majority of traders don’t beat the stock market.
• Most day traders and individual traders not only don’t beat the stock market but lose money.
• In the end, those with good processes can still perform well in markets.

Performance of Day Traders

Success Rates

Studies consistently show that only a tiny fraction of day traders are profitable in the long run:

• Depending on the timeframe and approximation, somewhere around 95% of day traders lose money.
• Only about 1% of day traders are consistently profitable.

Aggregate Returns

The overall performance of day traders as a group is poor:

• Aggregate net returns for all day traders were negative for every single year studied in a comprehensive analysis of Taiwanese traders.
• On any given day, 97% of day traders lose money net of trading fees.
• Generally speaking, the shorter the timeframe that’s trading, the more likely one is to lose money.

Factors Contributing to Poor Performance

Transaction Costs

Day trading incurs significant costs that eat into potential profits:

• Frequent trading leads to high commission fees.
• Going in and out means paying the bid-ask spread.
• Short-term capital gains are taxed at a higher rate than long-term investments.

Market Efficiency

The nature of financial markets makes consistent day trading success extremely difficult:

• Stock prices tend to adjust instantly to new public information.
• Day traders compete against sophisticated institutional traders and high-frequency trading algorithms.

Psychological Challenges

The high-pressure environment of day trading can lead to poor decision-making:

• Day trading requires intense focus and quick decision-making.
• Emotional reactions to losses can lead to further losses.

Comparison to Long-Term Investing

In contrast to day trading, long-term investing strategies have shown more consistent success:

• Buy-and-hold investors typically experience less emotional volatility.
• Long-term investors check their portfolios less frequently.
• Long-term portfolios of low-cost ETFs have a much higher probability of turning a profit over time.

Persistence Despite Losses

Interestingly, many day traders continue despite consistent losses:

• 74% of all day trading volume comes from traders with no history of success.
• Unprofitable day traders have a 95.3% chance of continuing to day trade in the following 12 months.

This persistence is often attributed to overconfidence and the allure of potential quick profits.

Conclusion

While day trading may seem appealing due to the potential for quick gains, the evidence overwhelmingly suggests that it is not an effective way to beat the stock market for the vast majority of participants.

Long-term, diversified investment strategies have proven to be far more reliable for building wealth over time.