Google Search “examples of consistently profitable day traders.”
You won’t find a single name. You will find a lot of 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 mashes short-term profits out of existence. Other articles explain why day-trading profit was never there in the first plane.
The Main Street day trader underestimates the tendency of extreme randomness in short-term stock prices.
Watch Below Deck: Premature Corkulation on Bravo
See: Bravo TV. 2014. Premature Corkulation
Overwhelming academic evidence shows that the stock market is beaten over weeks, months and years rather than in minutes and seconds.
How do I know this?
I am well connected as a finance professor at a major state university. And I have never heard of a day trader dying rich.
Business Insider concludes that folks who attempt to day-trade stocks “would be far better off working at Burger King.”
Read: Blodget, Henry. 2010. Here’s What Day Traders Don’t Understand. Business Insider.
Why You Should Think Twice About Day Trading Stocks
I am a collector of prominent investor biographies.
In all of my readings I have yet to find a wealthy estate made through day trading. Think about this statement.
I am contracted by the university system to read all existing writings in the field of finance. My particular focus is on the nature of investment returns.
And in my decades of extensive readings 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 research on market efficiency. Fama was instrumental in developing the empirical models built on testing efficiency in markets.
The Capital Asset Pricing Model (CAPM) became a precise tool for auditing claims of high returns on Wall Street.
Studies of short-term trading have concluded that gaining a mathematical edge over movements happening during a single trading session is like playing a rigged circus ring toss sinking in quicksand.
Shiller won the prize in large part for pointing out the impossibility of arbitrage in the long run. Limits to arbitrage allow the market to diverge dramatically from equilibrium.
This is why the big money is in enduring price movements.
The unpredictability of short term pricing is such that trading profits are elusive when buying and selling within the day session.
Four out of five people who day-trade lose money. Just 1% are “predictably profitable.”
This is confirmed by recent research by Terrance Odean of the UC Berkeley Haas School of Business. The study concluded that even the predictably profitable day-traders would make more money on balance flipping hamburgers.
Read: Barber, Brad, Yi-Tsung Leeb, Yu-Jane Liuc, and Terrance Odean. 2013. The cross-section of speculator skill: Evidence from day trading. Journal of Financial Markets 18. 1.24.
The Big Money is in Long Term Infrequent Big Bets!
Google Search: “examples of consistently profitable stock value investors” and you will find a lot of wealthy family fortunes. You will also find a lot of articles explaining why value investing is profitable.
Ditto for momentum investing.
The really big money in the stock market is made in tax sheltered stock investing accounts. Profitable long term trend tracking futures and currency traders must operate within a tax scrubbing corporate business structure.
Even so the big money is made by investors who can muster the iron willed conviction to stay large on a rising stock over weeks, months and years. Profit depends on how long the move lasts.
The best stock investors ride along like surfers. They work waves over which they know they have no control. The best of the best take profits with hard stops placed at entry.
These are adjusted upward over time.
High yield long run stock investing should be done within an individual 401(k) and a Roth IRA. Futures and Forex should be traded within a company you create.
Start with an LLC. But don’t open one until you make at least $17,500 in profit in the market.
Why? You can strip the taxes on the $17,500 of trading profits in an individual 401(k) plan straight off of 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 according to the study above.
It is much easier to make money in a day job. Then you can manage your retirement savings in a Roth and 401(k) plans on long run plays on value and momentum stock.
Indexing two thirds gives you training wheels at the start. This takes very little time per week and your odds of success are far higher.
Make sure you open an individual 401(k) to garner the supreme value of freedom in self-direction. The contribution directly reduces your W2 taxable income.
You can add a C corporation later if profits merit. The C-corporation allows you to create a family health plan and expense it off of your tax bill.
The C-corporation also allows you to create a profit sharing plan that offers further deduction.
If you make so much money that you can’t avoid taxes you are left with one alternative. Move your trading business to Puerto Rico under an Act 20 and 22 decree.
-Dr. Scott Brown