Transcription
I want to tell you guys about why you will almost certainly fail at day trading. Now, I made a video yesterday where I kind of memed on some day traders, made fun of them. Literally 2:15 in the afternoon right now, haven't even eaten, nothing all day, man. The trader lifestyle was really difficult.
But it surprised me how many of you came back to me and said, "Oh no, no, no, gurus, such and such is legit. No, no, my guru's legit." And I think there's a fundamental disconnect here because, as I understand it, day trading is a game that you will almost certainly lose. And it's clear to me that a lot of you guys don't believe that. And maybe that's because of all the marketing that's been going on with these gurus.
So I want to set the record straight, just for a second. Set aside your favorite Forex trader, you know, your favorite day trader, because they're trying to sell you something. Let's be honest, they're trying to sell you something. They have incentive not to tell you the honest truth about day trading. And maybe even they will tell you, "Oh yeah, you know, a lot of people lose," but here's what you won't hear: they'll give some reason for why you're special or why they're special, and how they're gonna suddenly make you successful, even though the majority of people fail.
Most people kind of know that, but let's go over the actual numbers because I think getting familiar with the actual statistics helps people make better informed decisions. I did this with Amazon FBA. When Amazon FBA was all huge, I did a video showing that only 8% of third-party Amazon sellers make even a fry cook's income. Guys, like, not a lot of money, just a fry cook's income. Only 8% of third-party Amazon sellers will ever hit those numbers.
So in this video, I want to do something similar and just show you how difficult day trading is. And I know a lot of day trading is about that excitement, the hustle, the day trader life. But I think if you get a good grasp of the numbers, if you understand the numbers, you won't be so convinced. So I'm hoping those of you who are kind of mathematically savvy will really pay attention to this video and understand the studies, the statistics behind all this, because you guys can't escape the reality of the numbers.
So before we get into these studies, we're gonna go over two important scientific papers about day trading. I first want to say to those of you who are gonna say, "Oh yeah, of course, the majority of day traders fail. The majority of YouTubers fail. The majority of anything fails." Wrong. Proved over and over again. We're the problem with that is that investing is one of those rare kind of domains where you can get all the advantages of investing with basically no effort using something called an index fund, which is what I use. And it's a passive investment tool where you just put money in, you set it, you forget it. And over time, index funds have consistently outperformed almost every other super flashy investment tool.
So you can, with basically no knowledge or effort, get the vast majority out of the stock market. You know, you might not be making as much as Warren Buffett a year, but you don't have to do anything. You're not spending your life on finances. Whereas, as we will find, the majority of day traders who are spending their life looking at a screen trying to, you know, chart the data, they're not even outperforming an index fund. So myself, and maybe you, if you decide to invest in index funds or whatever you decide to invest in, you can basically be doing nothing and outperforming a majority, a vast majority of these day traders who are flashed in the Lambo and whatever. You're making more with your index fund.
So let's go over the numbers. I want to show you guys in the data. Let's jump in. So the first paper we're going to be looking at is "Day Trading for a Living," where they do a brief summary of the literature on day trading and they explain the following: study after study has proven that the majority of day traders don't even make a profit. They lose money day trading. Check this out. This paper found that only 36% of day traders profit. Another study finds that 25% of all retail day traders profit. Another study finds that only 19% of day traders profit. So most people are losing money. That's already a given, right?
But how many people are actually making more money than you would with an index fund? Because I'm going to assume for a second that you guys don't want to waste your time day trading if you're not making more than an index fund holder like me, right? So with that in mind, let's turn our attention from not just who can profit at all, but who can profit more than an index fund, right? Who can make more money than you would if you just set your money and kind of forgot it?
Well, this is where we go to another study called "The Cross-Section of Speculators' Skill." This study looked at day traders in Taiwan from 1992 to 2006. And here's what they found: less than 1% of day traders are able to predictably and reliably earn positive abnormal returns, net of fees. So after you pay your fees, 1%? Actually less than that. What? Less than 1% is able to earn an above-average return. Do you understand how crazy that is?
So me with my index fund, just sitting here, right? No matter what the gurus say, they could say that they're special all they want. Me with my index fund, according to the data, not according to anecdote, according to data, hard data, I'm not performing 99% of day traders. Now, part of that is because of the fees, but part of that is for another reason. Because this is looking at what's called retail traders. And retail traders are people like me and you who are just handling our own money. We're not working for a bank.
Now, we need to consider institutional traders because when you're trading, right, you're trading across the table from somebody. And more often than not, that person might be an institutional investor. In other words, a bank. And this is where we go back to our next study. Once again, it's "Day Trading for a Living." And what's interesting about this study is they say, "Hey, we think that actually the fact that there are more hedge funds than ever, the fact that institutional investing has gotten bigger than ever, the banks are bigger and bigger percentage of the total shares traded every day." That fact puts retail traders at a disadvantage.
Because now it's not just Joe Blow on the internet versus Joe Blow on the internet, you know, atom versus atom. Now it's atom versus gigantic hedge fund supported by quants, right? It's atom against Renaissance Technologies, one of the few hedge funds which consistently has outperformed the stock market. Whoo, fun fact: one-third of their employees have a PhD in like math, computer science, or engineering. That's who you're trading against sometimes.
And so what this study looks at is, look, given that, given that hedge funds are bigger than ever, what's happening to the retail day trader, right? The guy who is trading all the time against these people? Are the numbers for day traders actually getting worse? And yes, they are. Because according to this study, which looked at the Brazilian futures market, this study found that only 3% of day traders were profitable after one year. Guys, that is insane. In other words, 97% of them lost money.
And this paper is really clear about who they're trying to convince with the findings. They say this, check this out: "It is now very easy for anyone to enroll in one of the many online courses about day trading or to join live trade rooms on YouTube where traders teach retail investors how to trade in real time. We show that it is virtually impossible for an individual to day trade for a living, contrary to what brokerage specialists and course providers often claim." Snake gang, that is it. Snake gang. That's all you need to know. Period. That totally nails it. Virtually impossible for an individual to day trade for a living, contrary to what brokerage specialists and course providers often claim.
And one of my favorite parts about this study is not only do they call out course providers in a scientific paper, but also they say, "Okay, look, even if the people, the 3% of people who are consistently at least going positive, how much are they going positive? Right? How much are they profiting? Is it even possible for the people who are profitable to be profitable enough to be a millionaire or to make all this money, flashy lifestyle, Lambo, whatever?"
Well, this is where it gets interesting. And it reminds me a lot of our Amazon study. Because check this out: in order to make a minimum wage, day trading, you have to be in the top 2.7% of day traders. Let me repeat that: 2.7% of day traders, top 2.7, in order to make a minimum wage. This is worse than Amazon FBA. At least Amazon FBA had 8% of them making a fry cook's income. So I mean, like, now Bezos is looking great compared to day traders. But in order to make the profits of a bank teller, what a bank teller makes, you have to be in the top 0.6% of day traders.
Now, guys, let's be honest. If you're looking up YouTube videos about day trading, you're not in the 0.6% of day traders. Let's just be real. And let's also be real about the fact that you can enhance your wealth by having a real job and just investing in an index fund.
So I hope this really clears up a lot of the confusion about day trading. You know, there's obviously a lot of hype around this industry. Even now, scientific papers are calling out course sellers for their fraudulent claims. But guys, at the end of the day, you guys have to look at the data, not at the hype. You have to look at the math, not at the madness.
So I hope this has helped you get a better picture of is day trading right for you. I would go out on a limb and say that it's not right for almost everyone. Most people are better cut out for just passive investing. But whatever you guys think, I want to hear about it in the comments section below. I know not everyone's going to agree with this video, but I want you guys to tell me why you agree or disagree. Which part of it you agree with? Do you think that there's some guru that still has a magical power with investing? Or do you think that these economists are right that with the rise of hedge funds, it's now harder than ever to beat the stock market consistently, and that honestly, you're better off just grabbing an index fund? Let me know in the comments below. And of course, I will see you guys next time. As always, don't forget to smash like and subscribe. Thank you. [Music] Ferrari.