Why 80% of Day Traders Lose Money (2024)

I recently came across a very scary statistic from one of the bigger public trading platforms.

An analysis of trading-platform data shows that 80% of day traders are unprofitable over the course of a year

According to the stock platform Etoro, they found that a whopping 80% of day traders lose money over the course of a year with the median loss of -36.30%!

It’s no surprise more than 75% of all day traders end up quitting within just two years.

So let’s go over why these investors are losing so much money, how you can avoid this pitfall and how you can end up making money in the long term instead of just throwing it away.

For those who aren’t aware day-trading is a style of investing in which you buy and sell a stock (or any other type of investment) within a short period of time (anything from minutes to a day or two)

This type of investment relies on daily momentum and price fluctuations in the market to make a quick short term “profit”... Or that’s the idea anyway.

In 1999 The North American Securities Administration Association or NASAA (Why do they have to choose a name like that!?) reported that:

70% of traders will lose nearly all their money

With only 12 percent of them actually making a profit on their short term trades, and now those numbers have only gotten worse! It’s through the increase of readily available apps like RobinHood that make it so easy to trade stocks that more people want to give this investment strategy a try. (and also fail miserably doing it)

But why do so many people just end up losing money?

Just consider this, a finance professor from Arizona State University analyzed the performance of over 26,000 publically traded stocks since 1926. He found that the average stock only traded for ~7 years and then ALL of their money. The common return of stocks over the last ~100 years was a loss of 100%. Less than 48.4% of stocks out there delivered a monthly positive result. That’s just slightly higher than the roulette wheel.

Most importantly out of all the 26,000 stocks analyzed, only 1,000 of them accounted for all of the profits in stocks since 1926, and out of those just 86 stocks (one-third of 1%) were responsible for half of those gains.

From this data, only 4% of profitable stocks made more money than the average return of a one-month super-safe Treasury bill. (That’s astounding!) The other 96% of profitable stocks really only kept pace with inflation.

It is worth noting that the data he analyzed (ALL stocks in almost 100 years) included a lot of really scammy penny-stocks out there. If you actually look at just the largest cap stocks out there, over 80% of them actually do return a profit over a 10-year rolling period. Yet still 56% of those performed worse than the overall market index. And remember the day-trader isn’t holding a diversified portfolio for anywhere near 10 years!

Not only do you have to be able to find and pick the few stocks that will sky-rocket, but you will also have to do it with the perfect timing. The vast majority of profits in the stock market is made in just a few days out of the entire year. If you happen to miss investing on the 3 best days of the year, you will will miss out on over 70% of the profits. This is why you so often hear the saying “Time in the market, beats timing the market”.

The likelihood of losing money day-trading is incredibly high from just looking at the numbers. But still, a lot of people will insist that they are smarter than the average day-trader and they will somehow land in 20% category that didn’t lose money, year after year for the rest of their life. Which brings me to the next big reason day-traders lose money… Overconfidence

Most investors are overconfident in their abilities leading them to trade more aggressively, take on more risk and thus… lose more money.

A study conducted in 2017 found that when stock-traders were successful and made a profit they disproportionally attributed success to their ability rather than luck.

On the opposite side when day-traders lost money, they often attribute it to bad luck and downplay their losses, leading them to want to keep going. Overconfidence like this is dangerous, it makes you more likely to jump into a trade without doing enough research or stay in a trade for too long when you don’t want to say to yourself that maybe you were wrong.

I often say regarding investing that ego is your worse enemy and admitting to yourself that maybe you were wrong about something, is a hard pill to swallow.

The hardest barrier to overcome with day trading is likely your emotions. Anytime you invest there are 4 emotions that will creep up: hope, greed, fear & regret. Often these emotions will overpower any amount of logic out there.

HOPE

At first, you are hopeful you will make a ton of money just like that 1 “investment guru” you saw on YouTube making millions of dollars by investing in no-name penny stocks or whatever else they are selling you through a course. You hear about so many success stories and think “what’s to stop me from doing these same trades?”

GREED

So you start day-trading and get greedy when you see your stock go up in value and think “How much MORE can it go up in value?”, “This is just the beginning, if I just hold onto it a little bit longer I’ll have made X profit…”

FEAR

And then you’re hit with fear. It’s the fear of missing out on profits if you just held onto it a little bit longer than “you should”, it’s the fear of losing money that causes you to sell the stock as soon as it goes down in value. Even though it might just end up sky-rocketing back up the next hour. The fear of loss is a much more powerful motivator than potential profit. (this is why insurance companies always try to scare you into buying, & it works!)

REGRET

Lastly, we have regret. This one I hear all the time, people regret buying a stock, people regret not buying a stock, selling too soon, not selling soon enough, etc. And then they think they won’t make that mistake next time.

These 4 emotions are going to seriously hinder your ability to make profits day-trading.

But that’s not all, the biggest reason day-traders lose money is the risk they take on. Day traders are more likely to make risky investments to reach for those higher potential returns, and as you can probably guess, high risk = high potential loss.

Imagine this scenario

You’re only trading $5,000
You make a 15% return in 1 year (which is a great return by the way!)
Trading 3 days per week 2 hours per day.

That’s 312 hours of work in a year, and what do you have to show for all that work? $4.80 per hour (assuming. you’re the in the top 10% of day-traders who managed to get such a good return!) You’d be better off working a minimum-wage job which is a lot less stressful.

That’s why people with little money to invest often take one HUGE amount of risk to try to get those +1,000% profits instead of the safer 7% profits. and thus sadly ends up just losing everything.

In the end, Day-trading is the most common “Get rich quick scheme” on the internet. People believe it’s just an easy way to make money from their computer or phone, and they think they can beat the market by following some “guru” out there who’s promoting his stock trading course or system.

If there really was a magic system to day-trading that could earn +100% profits in a year, there is no way that would be on sale for a $49 fee and Warren Buffet (a long-terrm value investor) would not be the most successful investor in the world.

The way I look at day-trading is no different than casinos, you can put a few dollars into it that you might otherwise spend at a casino, and you might get lucky a few times in a row. But in the end, the house always wins.

This type of investing style is inherently risky and when you understand why so many people fail, you can better adapt your investment style to something that will benefit you in the long-term with a better risk-to-reward ratio.

Not only are you competing with your own emotions when day-trading but also Hedge funds, institutional investors, high-frequency trading, algorithms, and just random news. The CEO had some unrelated scandal? Boom Stock drops 10% and you’re a day-trader so you immediately sell at a loss instead of just holding a few months it until it might just go back up.

It’s for these exact reasons why I have never had an interest in day-trading. Longterm investing is way less risky, less stressful, has better tax benefits and you are way more likely to make money over the next several years than you are over the next several hours or days.

This comes from someone who has spent years trying to develop a successful unbiased day-trading algorithm. But at this time, we haven’t come remotely close to the success of our long-term investing strategies with a +90% win ratio.

But I can tell you this much if we ever find a magic short-term algorithm that actually works. We won’t be selling it for $49 on YouTube!

This took a lot of research to write, so if you found this article helpful in any way please consider clicking that CLAP button a few times!

Thanks for reading!

Mark Lyck
Founder of https://weeklystocktip.com (algorithmic longterm investing)