(News Bulletin 247) – Almost all studies show that “day traders”, those investors who trade in the same session, are almost always losers. So much so that, according to one of them, it would be less risky for them to play at the casino.

It is a practice that deludes budding stockbrokers, and which has gained in popularity with the pandemic: “day trading”, that is to say the idea of ​​making profits on the stock market by making several round trips during the same session, every day.

“With lockdown and work-from-home policies in place, people found themselves with more free time and many turned to day trading as a way to supplement their income or just to pass the time.” , point out professors from the University of Lugano, Switzerland, Carlo Zarattini and Andrew Aziz, in a study published two weeks ago.

Robinhood is also the symbol of this appetite for the stock market during the Covid period. The no-fee broker rose to global prominence in January 2021, during the GameStop saga, which saw thousands of small shareholders drive the stock of this chain of video game stores from 17 to almost 500 dollars in a few days.

In a note sent Monday, John Plassard, investment adviser at Mirabaud, evokes a “fantasy” on “day trading”. “Everyone has heard of a ‘day trader’ who managed to buy in 2021 for 500 dollars of options on GameStop [le groupe américain de magasins de jeux vidéo, très prisé des investisseurs particuliers, NDLR] and resold them after less than 3 weeks at $200,000 […] Only here, the movements were extremely erratic and, one can easily imagine, there are more losers than winners”, explains the specialist in this note.

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“Virtually impossible” to live from it

Academic research actually shows that retail investors who practice “day trading” almost always come out the losers. This was the case of a study carried out by academicians led by Fernando Chague, of the Sao Paulo School of Economics, and published in June 2020.

Their work focused on a group of individuals who took positions on futures contracts on Brazilian indices, between 2013 and 2015. Their results are clear: on individual shareholders who persisted in this strategy of “day trading “, with at least 300 days in which they made at least one operation, 97% suffered a loss compared to their initial stake.

For the researchers, it is “virtually impossible” for an individual to earn a living by applying this strategy. Because only 1.1% of “day traders” have won earnings that exceed the minimum wage in Brazil and only 0.5% have earned more than the initial salary of a bank teller.

Another study: that of several professors, including Brad Barber, of the University of California, published in 2019. Their work focused on “day traders” who took daily positions on the Taiwan Stock Exchange, their analyzes covering a period ranging from from 1992 to 2006. These researchers observed that even the most experienced day traders lost money. The academics also found that less than 3% of “day traders” managed to generate a profit, once commissions were deducted.

The less risky casino?

To mention France, the Financial Markets Authority had published a study in 2014 which, if it did not relate exclusively to “day trading”, proved to be uninviting. The authority had, on the basis of data provided by market intermediaries, studied the gains/losses of individuals who had invested in the foreign exchange market (Forex) or CFDs (contracts for difference), speculative instruments with sub- miscellaneous underlying (a financial index, a bond security, a currency pair). The conclusion was that between 2009 and 2013, 89% of clients were losers, cumulatively over four years, with a median result of -1843 euros.

To the point that the casino may seem less risky than “day trading”. This is the argument put forward in 2011 by the asset management company Philadelphia Financial Management of San Francisco, in a note addressed to the SEC, the American stock market policeman. This company explained that FXCM, one of the main foreign exchange brokers, recorded, on average, two daily transactions per individual account, or 124 transactions per quarter. At the same time, the asset management group noted, based on data from several brokers, that the probability of currency losses for an individual over a quarter was around 70%.

She then compared this probability of losses with those on gambling, namely blackjack and “craps”, a game of dice, with the standard bet for the latter, called “come”. This is assuming that the person plays each time 124 times over a quarter. This shows a probability of loss of 56% for “craps” and 58% for blackjack against, therefore, about 70% for currency trading. “Not only is Vegas less risky, as a player can only lose the money placed on the table, unlike a forex trader who risks multiple times their capital, but their chances of winning are also much higher,” the company concluded. Management.

Isolated examples remain. The researchers from the University of Lugano mentioned at the beginning of the article have, in their study, shown that a technical “day trading” strategy, playing on the volatility of the start of the session and called “opening range breakout”, could allow to generate significant outperformance compared to a long-term passive position. But this strategy turns out to be complex and their study remains rather singular. The authors also acknowledged that this strategy required “a high level of effort and attention to market fluctuations”.

And John Plassard concludes in his note published this week that “history and recent experiences show us that to bring alpha to a portfolio [c’est-à-dire générer de la surperformance par rapport aux indices de référence, NDLR]it is not towards ‘day trading’ that you should go, but rather towards a certain wisdom that will allow you to invest in several stages”.