Longtime prop trader says 4% of day traders made decent money

Discussion in 'Educational Resources' started by Slope Trader, Sep 26, 2022.

  1. Interesting article from this year says that 4% at a prop firm earned enough to make a living (with some caveats) and 10-15% made at least some money.

    Also tries to explain how some brokers claim that only 70% of their clients lose money each year but do so by excluding closed accounts. Also has some advice for new prop traders. Link for the article is at:
    https://tradethatswing.com/the-day-trading-success-rate-the-real-answer-and-statistics/


    The Day Trading Success Rate – The Real Answer and Statistics

    March 14, 2022

    Here is the real answer on the odds of becoming a successful day trader. This data is based on the success rate I witnessed while day trading for a propriety trading firm for 6 years, and also from conversations with other proprietary trading firm operators. A proprietary trading firm is one that fully or partially supplies traders with capital, and in exchange, the firm takes a cut of their profits (business models vary, but that is the basic idea).

    Given training, money, and experienced traders to help them out, the day trading success rate for trainees becoming consistently profitable traders was extremely low. For traders with little money, little help, or little time, the odds would likely be even lower or the journey will be longer.

    While the statistics you are about to read about may seem grim, I don’t look at it that way. To be good at anything take works, and most people don’t really work that hard at trading. They put in some hours hoping they’ll be able to sit on the beach all day in a few months. But if you’re passionate about trading, then you WANT to trade, now and 5 years from now. You think beaches suck compared to trading (beaches have their place…after the trading session). You hate weekends when the markets are closed, or at minimum look forward to Mondays, and you crave improvement. Those are the people that are successful in this business. The other 95% wash out quite quickly; if you aren’t really interested in trading but just want to do it for some quick thrills, or because you think everyone is else doing it, then this article is for you. You will very likely fail.

    In other words, I believe these statistics apply to the “I will give it a try” people. Not the people who are passionate about trading. Passion is not enough, though. Find out what else you need below.

    This article will look at:

    • The day trader success rate I have witnessed.
    • Some misinterpreted statistics and biases that hide how hard successful trading is.
    • How to have a better chance at being a part of the small group (small relative to all who try) that is consistently successful.
    • Sprinkled throughout are stories of my journey, trading for a living since 2005, first in stocks, then in forex (I also swing trade stocks and forex).
    Here’s the one-page quick read, with additional details below.

    day trading success picture.png


    The Day Trader Success Rate

    During my time at the proprietary trading firm, before moving on to trade independently, I saw loads of want-to-be traders come to firm to day trade, yet very few made the cut. These were people willing to go through several interviews, sign contracts, and make a commitment to show up every day and adhere to the risk management protocols in place on their way to becoming potentially career day traders. These were, at least on the surface, committed people.

    Between the firm I traded at, and from conversations with other proprietary firm operators over the years, about 2,000 traders came through the doors. The success rate—success meaning they could make a living from the markets (that doesn’t necessarily mean a great living)—was about 4%. So out of the approximate. 2,000 people, about 80 were good enough to trade for a living. The other (approximately) 1920 gave up, left, or were fired.

    All these people were training and practicing 6 to 8 hours per day, every weekday. They had access to capital and help from successful traders (most didn’t use it). And still, only about 4% managed to make a living from day trading.

    The day trading success rate, including people who were slightly profitable, but couldn’t make enough live off, was likely in the vicinity of about 10% to 15% of those who came through the doors. These people may have gone on to trade on their own, as a side gig, but they couldn’t make enough to live off of.

    In summary, if you want to make a living from day trading, your odds are probably around 4% with adequate capital and investing multiple hours every day honing your method over six months or more. Lucky early winning streaks don’t count. I am talking about consistent month-after-month profits.

    Most of the traders who did make money took five months or more to do it. I lost money (small amounts) for four months. Made a tiny bit in my fifth, equivalent to a part-time job in my sixth, a meager livable amount in my seventh, and then it kept going up from there.

    How long it takes you will depend on your income goals, how much capital you have, and your return from your trading strategy. Here are some income scenarios for forex day trading. For stock day trading, you need at least $25,000 in starting capital, and typically get up to 4x leverage. Of that amount of capital, it’s possible to do well. You can also start trading Futures with less capital.

    If you don’t have much capital, and don’t have a lot of time to commit, the odds of making a living from day trading are remote. It is possible, but it is going to take a lot of time and discipline to build a small account into something that can produce a living.

    If you want to make some money on the side, you’ll still need the same dedication, putting in likely many months to refine a method and overcoming sabotaging tendencies. But the odds of meeting these lower expectations are greater, with a success rate around the 10%-15% area.

    These are not perfect statistics. There are many things to consider. BUT, conditions were very favorable at the trading firm(s), and yet there is no question that most people could not make money as easily, or as quickly, as they assumed.

    Understanding the Day Trader Success Rate

    Stats are often quoted, such as “95% of traders lose money” but new traders assume they’ll be in the 5% because they think themselves smarter than most. Trading isn’t about being smart. It is about being disciplined; methodically coming up with a trading plan and sticking to it.

    Many new traders also believe that these stats (only 5%, or less, succeed) are a lie because they see loads of people flaunting how much money they are making in online forums or social media. It seems like many people are doing very well!

    This is called availability bias (see The Art of Thinking Clearly on this trading book list). It is believing that what we see most often is representative of all things, including what we don’t see. Look at the dead space. There are likely thousands of members in those groups, and yet only a few are constantly parading profits. There are maybe hundreds or thousands in those groups losing money, but those people aren’t talking. You can’t know a success rate based on success stories without knowing how many people are also failing, and people who lose are typically much less vocal.

    The facts in the section above show how many people succeeded out of the total. And yet the firm, of course, didn’t discuss this, they only showed new recruits how well the traders who did succeed were doing. New traders are only seeing one side of the picture, the tiny more glamourous side.

    For further reading on why most traders lose, and the reasons behind it, see The Real Reasons Most Traders Lose Money.


    What about brokers saying only 70% of people lose money?

    In Europe, brokers are required to show how many people lose money while trading with that broker. I typically see figures around 70%, such as “72% of clients lose money trading with this broker.” You will see it on their ads or on their website.

    While the regulators likely intended to make this a deterrent by showing how hard trading is, it actually makes it look much easier than it is! 30% of traders winning (70% losing) is way better than the 4% (living) to 10% (side hustle) I’m talking about.

    Again, we have an availability bias. The statistic that brokers publish is based on existing clients only! It does not include people who lost money and closed their accounts.

    For example, let’s say 1,000 people open accounts with a broker over the course of a year.
    600 lose some money quite quickly and close their account and tell all their friends to never try day trading.

    Of the 400 remaining, 30 are doing well, 70 are profitable, and the other 300 are losing money to various degrees, but still have their account open.

    The broker is saying that 100 people (30+70) out of 400 are profitable …about 25%. But this statistic is only based on live accounts, it doesn’t factor in people who lost heavily or closed their account in the negative (or positive). The real statistic should be that 100 people out of 1,000 (not 400) are profitable. And if 10% are profitable, we of course know that only a portion of that will be people doing very well.

    If you start thinking about all the accounts that likely were opened and closed due to losses, which aren’t being counted, well, it becomes pretty obvious they don’t want to publish those statistics.

    Also, these figures published by brokers will include longer-term traders and investors as well. They are not isolating only short-term traders.


    How to Become a Successful Day Trader

    The day trading odds dictate that very few will succeed, yet I believe any individual can choose to be part of the successful group by putting in a lot of efficient work. Efficient means, you aren’t just putting in hours, you have defined steps and protocols for improvement and measuring that improvement.

    We also must realize that this hard work must be done ourselves. We can buy courses and read books for ideas on how to do things, but it is still up to us to put in the work to make ourselves consistently profitable. A competitive advantage can’t be bought.

    The hard work includes:

    • Typically practicing and honing a specific method for at least 6 months or more, five days a week. Distraction and trying out different things will extend that time frame. Part time trading, or long breaks between trading, will extend the time it takes to get good.
      • Honing and refining a method means developing a strategy and taking many trades with it, and then looking over those charts/trades to find any areas of improvement such as shaving a fraction off the stop loss, expanding the profit target, a better configuration for the trailing stop loss, finding ways to improve the entry to help shave a loss or two off the scorecard without missing out on winners. Consider how to improve the reward:risk ratio.
      • Improvement may sometimes happen in big leaps, but it is micro-adjustments in refining the strategy that start turning losing days into winning ones. Over 100 trades, it is finding a few extra winners, cutting a few losers, getting better entries so the stop loss can be smaller, or finding a bit of extra profit on the winning trades that starts to make a real difference.
      • There is a BIG difference between just putting in hours and taking conscious steps to improve.
    • Building a Trading Plan. A trading plan is way more than just a couple of strategies you read about online or in a book. It is a business plan, outlining how you will handle everything related to your trading and yourself. How you will handle losing streaks, big wins, position-sizing, taxes, steps you’ll take to improve, how you’ll review your results, goals, routines, what to do if you keep making the same mistake over and over, how you’ll balance life and trading? There’s a lot to consider. The more you consider and really think about, the less there is to distract from trading and the better you will likely trade.
    • Developing confidence in the method being used, and in ourselves, to execute it day in and day out when real money is on the line. This confidence must be earned by going through the items discussed above. Confidence is misplaced without a trading plan, loads of practice, and improving problem areas.
    Trading for 0.5 to 2 hours and making a living is the end result of this work. Intense work comes prior. Many people see others working 1-2 hours a day and enjoying the good life, and think it is easy and they can do that too. They end up skipping all the steps that the successful trader took to achieve that lifestyle.


    Final Word on the Day Trader Failure Rate

    Work hard, and focus on improving your own trading. Don’t listen to others talking about outlandish success or devastating failure. What happens to you is based on what YOU do. Focus on implementing your strategies and improving your problem areas. Find your strengths and capitalize on them.

    Trading is hard work, but I do believe it is possible for those that are dedicated to succeed at it. It’ll have ups and downs, but focusing on ourselves and becoming better is all we have control over.
     
  2. 96%+ of traders lose because they are doomed from the get-go with an inferior plan, strategy, understanding, process, tactics and mindset/psychology,
    A significant portion of these amateurs have lost because they have learned from bogus gurus, who were just out to quickly enrich themselves, at their expenses,

    If I had to personally coach and teach just one student, or two max, I can practically guarantee you I'll have a 100% student success rate,
    The Conflict Arises....when the guru, teacher, or social media personality, or trading academy......feels compelled to Mass Produce courses, products, to sell to as many Mass Produced students out there as possible, no matter how weak or fake the product and outcome may be,

    The absolute best traders in the world....have all took more or less around a decade, before their strides and successes truly picked up,
    Becoming a master at this craft is similar to obtaining a black belt in karate or Ph.D....it won't and can't happen overnight,

    The casual casino gambler will never come out on top versus the casino when they play blackjack or roulette. Even though the odds are more or less 50/50. Similar thing with trading and choosing to bet up or down at any given moment in time....those lost mice and ants are razzled, dazzled and confused,
     
    Last edited: Sep 27, 2022
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  3. deaddog

    deaddog

    There is no mention of what a good living is dollar wise.
     
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  4. maxinger

    maxinger

    upload_2022-9-27_14-51-53.jpeg
     
  5. Some interesting studies about the percentage of (consistent) profitable traders here. I have attached the corresponding studies.

    [​IMG] The Cross-Section of Speculator Skill.pdf 522 KB

    This paper seeks to understand the differentiating factors between successful and unsuccessful day traders in Taiwan. The authors received comprehensive trading data from the Taiwan Stock Exchange from 1992 through 2006. They defined day trading as the purchase and sale of the same security, by the same individual, on the same day, which accounts for approximately 17% of the overall volume on the Taiwan Stock Exchange. On average there were 450,000 individual day traders during each year, of which about half (277,000) traded in amounts larger than $20,000 USD-equiv each day. The key findings were:


    1. Any given year, only about 19% of the > $20k day traders made positive abnormal returns (i.e., did better than the market) net of fees. That's 1 in 5.
    2. Only 4,000 individuals (less than 1% of the population of day traders) were able to consistently profit, net of fees.
    3. The top 500 traders were remarkably consistent and generated outsized profits, earning net +37.9bps per day.
    4. The "bottom" 440,000 traders (the overwhelming majority of the 450,000 population) lost about 25-29bps per day.
    5. While the overwhelming majority of traders lost money - data showed a consistent trend that highly active day traders outperformed occasional day traders.
    6. Trader performance was statistically more consistent and non-independent than random luck would predict. That is, the profitable traders (of which there were exceedingly few) were not just getting lucky.
    7. Profitable day traders performed especially well trading few volatile stocks near earnings announcements - suggesting that the source of profits comes from their superior trading judgement and expertise in those stocks, and not from just providing liquidity to the market.
    8. Insider trading may be attributable to some of the profits, and cannot be ruled out, though the consistent profitability of the highest performing day traders, even outside of earnings announcement periods, suggests this is not entirely the case.
    9. The evidence suggests that profitable day traders "react more quickly to public information signals in their trading strategies" than the unsuccessful traders.


    In conclusion, the paper finds strong evidence that day trading is consistently and highly profitable, even net of fees, to those with 1) the best information/strategies, 2) the best systems/access to trade quickly, and 3) the highest conviction/discipline. However, this accounts for fewer than 1% of all traders. In all likelihood, these are career professionals with great connections and highly sophisticated trading tools and systems. The overwhelming majority of day traders lost money, consistently, and worse than random luck would predict.
    ---------------------------------------------------------------------------------------------------------
    [​IMG] SSRN-id3423101.pdf 170 KB

    This study is an analysis of all new day traders on the Brazilian equity futures market from 2012-2017. (Futures are particularly compelling for day traders in the USA as well, as they are highly liquid markets and exempt from particular PDT taxes that apply to day trading most other securities).
    The distinction here of only using new day traders is interesting, since it very likely weeds out the highly sophisticated professionals referenced in the Barber study above. Rather, this study is probably a more realistic view of what an 'everyday' person can expect if they quit their day job and start day trading. Highlights and findings from the study:


    1. The study covers about 20,000 individual investors who began day trading in 2013, 2014, and 2015, defined as an investor who did not have any day trades in the prior calendar year.
    2. Returns clearly show that probability of being profitable goes down proportionally with the volume of trades made. That is, the most profitable cohort of day traders were those who only made a single day trade all year.
    3. Of the most active traders (1,500 of the 20,000 population), data shows performance did not improve over time. I.e., those individuals did not learn or improve their skills in subsequent trades.
    4. Of the most active traders, only 17 individuals (1.1% of the active group) earned more than Brazilian minimum wage, net of fees.


    Overall, the paper concludes that "it is virtually impossible for an individual to day trade for a living, contrary to what brokerage specialists and course providers often claim."
     
  6. How much do the best prop traders make?
    A prop trader makes between $42,373 and $793,331, depending on their skills and experience. The median salary for prop traders is $203,679. Middle 57% earn between $203,679 and $400,084. The top 86% make $793,331. A beginner prop trader can do much less at the evaluation stages.
    2022-09-22_231139.gif
     
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  7. M.W.

    M.W.

    Funny how the same guys here who talk day in day out about TA would never include themselves in the 96% and yet it's clear they don't make hardly anything at all or are persistent losers.
     
  8. rb7

    rb7

    These stats are not in synched with the content of the OP.
    If only 4% are profitable, it's impossible that the average yearly income (or salary?) is 122k$.
     
  9. Other things in life work out this way too. People try lots of different things without giving it much effort just to see if it might be for them. You really don't need to compare yourself to those feeble attempts. Just work at it harder.
     
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  10. The average is very heavily weighted towards those who keep trading, which just happens to be the successful traders. They don't add "earned $0" each day for those failed traders who left and are no longer trading.

    So yes, it is very possible and the number makes good intuitive sense. If you can make enough to pay your bills you may just keep doing it.
     
    Last edited: Sep 27, 2022
    #10     Sep 27, 2022
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