Why most day traders lose

Most people who day trade lose money. That is not my opinion or a scare line. It is what the best studies on the subject keep finding, and it is the right place to start a course on risk.

I trade full-time, and I still think most people shouldn't trade. If you do decide to try, you should know why the odds are poor. Then you can focus on the parts that are in your hands.

What the research found

The clearest study comes from Brazil. Researchers followed everyone who started day trading the Brazilian equity index futures market between 2013 and 2015. Among people who kept at it for more than 300 days, 97% lost money, and only 1.1% earned more than the Brazilian minimum wage. These were not one-week tourists. They were people who stuck with it.

A second set of studies looked at day traders in Taiwan over many years. Brad Barber, Yi-Tsung Lee, Yu-Jane Liu and Terrance Odean ranked traders by one year's results and then watched the next year. They found that fewer than 1% of day traders reliably earned positive returns after fees. A later paper by the same group, with Ke Zhang, found that most day traders are unprofitable and that 74% of day trading volume came from traders with a history of losses.

So the evidence points one way. A small group does well, and the large majority does not. Nobody can tell you in advance which group you will land in.

Four reasons traders lose

The studies measure results, not causes. Still, a few problems show up again and again when you look at how losing traders behave. Here are the four I see most.

1. Costs. Every trade pays commissions and fees, and you often give up a little on the fill. The Taiwan study found a large gap between returns before fees and after fees. Small costs add up fast when you trade every day.
2. Overtrading. More trades means more costs and more chances to make a mistake. Boredom, a loss you want back, or a fear of missing a move can all double your trade count.
3. Oversized positions. One trade that is too big can erase weeks of careful work. This is the fastest way to blow up an account, and it usually starts with "just this once."
4. No edge. An edge means your setup makes more than it loses over many trades, after costs. Most new traders never test this. They trade on feel and hope the results are positive.

What you can control

You cannot control the market, and you cannot make a weak setup strong by wishing. But you can control most of the list above. You decide your size. You decide how many trades you take. You decide when you stop for the day.

That is what the rest of this course covers. You will set your risk before each trade, place a stop with a reason behind it, and size your position with simple math. You will also set a daily loss limit and learn how drawdowns and losing streaks really work. The last lesson shows you how to tell, with numbers, whether you have an edge at all.

None of this guarantees a profit. Good risk control does not create an edge. What it does is keep you in the game long enough to find out if you have one, at a cost you chose ahead of time. If you are still deciding whether to trade, read Should you day trade at all? first.

The takeaway

Studies from Brazil and Taiwan show that the large majority of day traders lose money. Costs, overtrading, oversized positions and having no edge explain much of it. You can't control the market, but you can control size, trade count and when you stop. That is where risk management begins.

Do this today

• Read the abstract of the Brazil study and note how many people in it lost money.
• Write down how many trades you took last week, or would plan to take, and ask if each one was planned.
• Look up the full commission and fee cost of one round-trip trade on your platform.
• Write one sentence saying how you will know if your setup has an edge.

Check yourself

Answer each one in your head, then open it to check.