Corona Del Mar, CA
Howdy Chris!
A notable study called "Day Trading For A Living," tracked 1,600 Brazilian day traders for over a year.
Remarkably, only 3% of them were profitable.
This percentage is likely even lower, as the study only included traders who were active for more than 300 days (so there's a survivorship bias).
There's a 90/90/90 rule in day trading: 90% of traders lose 90% of their account within 90 days. Furthermore, it's important to note that only a small fraction, specifically 1.1%, of these day traders made more than the minimum wage.
Firms on the other side of these trades, like Citadel, make billions per year.
So what's going on?
Why do most active traders bleed money?
According to eToro, 89% of their traders use technical analysis for trading decisions.
Most TA is subjective and not back tested by computer. Practitioners are in fact being fooled by randomness.
Think about it: I can go to a website like Tradingview and -- for free -- start drawing lines, adding Fibonacci retracements, dozens of indicators, and even do some simple backtesting.
They have over 60 million users and a $3 billion valuation.
Never has it been so easy to get your hands on software that used to cost thousands of dollars back in the 90's when I started.
So I have one question: Why are so few of their users making money?
Earl Nightingale said: "Whatever the majority of people are doing, under any given circumstance, if you do the exact opposite, you will probably never make another mistake as long as you live.
Well, as it turns out, of those that practice TA, only about 15% ever go through the trouble of programming trading rules into the computer and running a backtest.
And of that group, an even smaller percentage (15%?) know anything about statistical significance, and out of sample testing for verification. They end up creating over-fit monstrosities that perform terribly in the real world.
And out of that small group, fewer still have ever attempted to use weird data for trade signals. (15%?) Heck, I didn't try that until 2006. Why? Because it was difficult.
If each stage of profitable technical analysis only consists of 15% of the prior group (15% * 15% * 15%), then only .34% of traders make it to that level.
That's where fortunes are made.
To sum things up, it has never been easier to get started with TA. The charts have never looked so gorgeous. But those aren't the tools that make money in the markets. The lack of results for millions of traders speak for themselves.
Do you know what other industry has practically zero barrier to entry, is associated with glitz and glamour, and millions lose?
Casinos!
Take this as a friendly reminder: You can't have outsized results doing what everyone else is doing.
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