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Google search “examples of consistently profitable day traders.”
You will not find a single name. You will find many articles explaining why day trading is not profitable.
The most compelling articles discuss how high-frequency trading (HFT) by financially and intellectually well-backed Wall Street firms wipes out short-term profits. Other articles explain why day trading profits were never in the spotlight.
The Main Street day trader underestimates the trend of extreme randomness in stock prices in the short term.
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Watch: TV well done. 2014. Premature Corkulation
Overwhelming academic evidence shows that the stock market is earned in weeks, months, and years rather than minutes and seconds.
How do I know this?
I am well connected as a professor of finance at a major state university. And I’ve never heard of a day trader dying rich.
Business Insider concludes that people trying to day trade stocks “would be much better off working at Burger King.”
Read: Blodge, Henry. 2010. This is what day traders don’t understand. Business Insider.
Why You Should Think Twice About Day Trading Stocks
I am a collector of biographies of prominent investors.
In all my reading, I have yet to find a rich property made through day trading. Think about this statement.
I am hired by the university system to read all the existing writings in the field of finance. My particular focus is on the nature of investment returns.
And in my decades of extensive reading I have yet to find a terminally rich day trader.
The curse of frequent small bets
Eugene F. Fama and Robert J. Shiller shared the 2013 Nobel Prize in Economic Sciences for their research on market efficiency. Fama was instrumental in developing the empirical models built on the efficiency of testing markets.
Tea Capital Asset Pricing Model (CAPM) it became an accurate tool for auditing high-yield claims on Wall Street.
Short-term trading studies have concluded that gaining a mathematical advantage over moves that occur during a single trading session is like playing a rigged circus ring toss that sinks into quicksand.
Shiller won the award largely for pointing out the impossibility of long-term arbitrage. Arbitrage limits allow the market to deviate dramatically from equilibrium.
That is why the big money is in bearing price movements.
The unpredictability of short-term prices is such that trading profits are elusive when buying and selling within the day’s session.
Four out of five people who day trade lose money. Only 1% are “foreseeably profitable”.
This is confirmed by recent research by Terrance Odean of the UC Berkeley Haas School of Business. The study concluded that even predictably profitable day traders would make more money flipping burgers.
Read: Barber, Brad, Yi-Tsung Leeb, Yu-Jane Liuc, and Terrance Odean. 2013. The Cross Section of Scalper Skill: Evidence from Day Trading. Financial Markets Magazine 18. 1.24.
The big money is in the rare long-term big bets!
Google “examples of consistently profitable stock value investors” and you’ll find plenty of wealthy family fortunes. You’ll also find many articles explaining why value investing pays off.
The same goes for momentum reversal.
The really big money in the stock market is made in tax-sheltered stock investment accounts. Profitable long-term trend-following forex and futures traders must operate within a tax-cleansing corporate trading structure.
Still, the big money is made by investors who can muster the iron-clad conviction to stay on top of a rising stock for weeks, months, and years. The profit depends on how long the movement lasts.
The best stock investors surf like surfers. They work waves over which they know they have no control. The best of the best take profits with hard stops placed on entry.
These adjust upwards over time.
Investing in long-term, high-yield stocks must be done within an individual 401(k) and Roth IRA. Futures and Forex should be traded within a company that you believe.
Start with an LLC. But don’t open one until you make at least $17,500 in profit on the market.
Why? You can remove taxes on the $17,500 of business earnings in an individual 401(k) plan directly from your W2.
And remember that you will have to work very hard to trade stocks, futures or Forex for a living. The odds are 900 to 1 against your success based on the above study.
It is much easier to earn money at a day job. Then you can manage your retirement savings in Roth and 401(k) plans into long-term stocks with value and momentum.
Indexing two-thirds gives you training wheels early on. This takes very little time per week and your chances of success are much higher.
Be sure to open an individual 401(k) to get the ultimate value of freedom in self-direction. The contribution directly reduces your W2 taxable income.
You can add a C corporation later if the profits warrant. The C corporation allows you to create a family health plan and spend it from your tax bill.
The C corporation also allows you to create a profit-sharing plan that offers an additional deduction.
If you make so much money that you can’t avoid taxes, you have an alternative. Move your commercial business to Puerto Rico under a decree of Law 20 and 22.
-Dr. scott brown