Kyle Johnson
You already know that the odds of success in day trading are low. But they’re probably worse than you imagine.
Even if you have no interest in day trading, someone in your life might. And here’s a few things they should know.
Less than one percent.
That’s the percentage of day traders who “reliably earn positive abnormal returns net of fees,” according to a 2014 study published by the Journal of Financial Markets.
To put that into perspective, a joint study by researchers at the University of Michigan and the University of Connecticut found that 13.5% of gamblers win in the long term. The researchers analyzed the casino loyalty reward accounts of over 18,000 gamblers with a minimum of two years’ play.
I’m not suggesting that aspiring day traders take the next flight to Vegas. But the numbers are daunting and likely getting worse.
In 2017, JPMorgan estimated that just 10% of trading is regular stock picking.
In 2018, a fund manager at Jupiter Asset Management estimated that 80% of daily trade volume is done by machines.
A 2019 study estimated that algorithms were responsible for 92% of forex trades.
With respect to markets, this is all ancient history. As Lobo recently explained, anything that can be systematized and automated, will be. For decades, Wall Street firms have poached the brightest minds the world over. They spend day and night building proprietary models and algorithms to gain an edge.
Financial firms are in an all-out speed-war. A 2021 paper in The Quarterly Journal of Economics stated that high-frequency traders now compete for nanoseconds (billionths of a second).
It might just be a penny here and there, but this can add up to billions in a hurry. And there’s a lot of failure along the way.
Ken Griffin, founder of the hedge fund Citadel, recently claimed that his best stock pickers “are right about 54% of the time, in alpha terms.”
I’ve previously written about the late Jim Simons’ Renaissance Technologies. With a 66% annual rate of return, it is the most successful quantitative trading fund in history. Former Renaissance co-CEO Bob Mercer claimed, “we’re right 50.75% of the time… but we’re 100% right 50.75% of the time. You can make billions that way.”
Wall Street firms have more intellectual horsepower than any one investor. They have better information and they’re faster. It’s often overlooked, but their deep pockets allow them to be wrong—often. This is an important a luxury most traders cannot afford.
Day trading isn’t David vs. Goliath; it’s a mosquito vs. the Death Star.
Try if you want, but I have no interest in that fight.
Day trading is difficult enough. But making matters worse, it’s rumored that many popular retail platforms front-run their own customers—meaning, privileged insiders make trades in the short time before pending trades are finalized. Consequently, their own customers transact at suboptimal prices.
Regulators have issued fines for such behavior. But in my opinion, the fines weren’t big enough to deter similar behavior in the future.
I encourage you to search for previous improprieties committed by the platforms you use.
Sometimes you just need to call a spade a spade. Barring a handful of extremely rare exceptions, day trading is just gambling.
Earlier this year, finance professors at New York University published a study that found that the median retail investor spends approximately six minutes before deciding to buy a stock. The mean was just 30 minutes.
But this was for all investors.
I suspect it’s much worse for day traders. They expect to consistently beat armies of PhD mathematicians, physicists, statisticians, computer scientists, etc., with a few minutes of research?
Get. Real.
Continued success without due diligence requires luck.
Supposing you still want to give it a go, please exercise extreme caution when searching for educational materials and mentors.
The world of financial publishing is full of sharks. The most dangerous seem to concentrate around day trading and forex. You don’t want to end up like Chief Brody, Captain Quint, and Mr. Hooper from the movie Jaws, praying for a bigger boat.
Go to YouTube and enter a few generic search terms. You’ll receive countless results, most geared towards beginners.
Why?
Because most beginners don’t know how to tell shit from Shinola. Many beginners will believe anyone capable of regurgitating technical jargon is an expert.
It’s bad enough to do this in front of a webcam in a home studio. Head over to Instagram and TikTok, and you’ll find even less substantive investment information, but more exotic cars, mansions, private jets, and scantily-clad women.
I’d steer well clear of anything that might capture the attention of a typical thirteen-year-old boy.
Day trading often appeals to younger adults, especially men.
This makes sense as young people (men in particular) tend to have a higher risk tolerance than most. On the whole, I think it’s a good thing.
But calculated risks are different than gambling—especially when desperation comes into play. Sadly, many young people are very concerned about their futures.
Recent stats show that unemployment for Generation Z males is roughly the same for college graduates and non-graduates.
An Intuit poll found that two-thirds of Gen Zers fear they’ll never have enough money to retire.
Fear and financial decisions tend to mix with bad results. I can’t imagine how feeling “behind” would do anything but negatively impact one’s trades.
Beware the info-product sharks; they love to prey on insecurity.
If day trading still has appeal, then you might as well give it your best shot. Playing woulda-coulda-shoulda the rest of your life might be a fate far worse than trying and failing. There’s value in failing at something despite your best efforts.
But should you fail, it doesn’t mean that you must “play it safe” and hand your money over to Wall Street pros.
What’s an intelligent investor with an appetite for risk to do?
Go where individuals don’t have to fight head-to-head against teams of PhDs and their algorithms. A place where nanoseconds are irrelevant.
Admittedly, this is self-serving. But resource speculation involves factors that can’t (yet) quite be quantified—like the integrity of management teams and the kleptocratic proclivities of bureaucrats.
Accounting for certain intangibles is artistic. But it ain’t paint-by-numbers.
There’s hockey-stick potential. And it’s less risky than many imagine.
If you’re ready to grab your paintbrush, so to speak, we’d be happy to help.
KJ
P.S. Giant green candles are relatively common in metals and mining. Lobo has a knack for being in the right place at the right time. To receive his latest thoughts on the markets, subscribe to our free, no-hype, no-spam newsletter: the Speculator’s Digest.
