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Can Day Trading be profitable for retail?

  #88 (permalink)

New York, NY
Trading Experience: Beginner
Platform: Vanguard 401k
Broker/Data: Yahoo Finance
Favorite Futures: Mutual funds
Posts: 1,046 since Jul 2012
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bobwest View Post
To be clear, @artemiso's data shows that 21% of small-account trades make money (pre-commission and fees) -- or 79% lose -- not 21% of small-account traders.

With this data, a given trader in the small-account group could have 100% profitable trades (not too likely), or 0% profitable trades (probably some do.) The data does not group the trades by account, for reasons stated. Most traders will have something in between, but the overwhelming bias will be toward losses, which is the best takeaway from this. (Someone doing no better than the average for the group will have only 21% winners, which is not a good number. There may be outliers who do better, possibly much better, but probably not many.)

Also, these are gross P/L numbers, without commissions and fees, so the actual positive results will be less. However, assuming that most of the 21% of winning trades will be net losers after fees is not something that is in the data, and individual fees will be different for different trades. Certainly the net after-fees number of winning trades will be less by some amount.

This does not show that profitable trading is impossible for the small trader, but it does show that it is difficult and seldom achieved. This is consistent with industry lore (it is often said that "95% of traders fail") and with the general experience on this forum. Traders need to understand the probabilities of what they are attempting, and these are real numbers that address that.


This post is an important addendum to mine if you need further interpretation of the results. There's a few things I'll add to Bob's post.

1. The trade PnLs I've posted are against my firm. There's other trades between these accounts and other market makers, and between these accounts and other such accounts, which are not addressed. However most of the trades on such pools are between these accounts and liquidity providers, and it's fair to assume the other liquidity providers are efficient too.

2. As Bob explains, your account can be wildly profitable even if you have 21% probability of your trade making a gross profit. However if that's the case and the distribution remains unchanged, the probability that your account 'survives' converges to 0 as you increase the number of trades. We see that some accounts don't trade at all, but most accounts trade more than once. So it's well likely that the number of accounts that lose money on a gross basis 1 year out is higher than 79%.

3. These trade PnLs are marked out in some way, so due to trade allocation scheme and path dependence, some of these profitable trades to us are also profitable trades to our counterparties. A naive example is if our counterparty takes a trade, it moves 1 tick in our favor, we get out passively, then it moves 2 ticks in their favor; both parties are profitable in the end.

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