Day trading and leveraged trading. How much can you earn? / Hebrew

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Scientific research and statistics show that the vast majority of day traders lose money, with only a small percentage able to generate long-term high profits. Even those who constantly lose continue to trade despite their losses. It is unlikely that anyone can make significant money through speculation or day trading without being a math genius with several educations and backing from a leading investment bank, according to an article in InvestmentNews. Investment gurus who offer courses on how to make money often do not have profitable trades themselves and select their materials in advance to avoid exposure as fraud, it added.

Day trading and leveraged trading. How much can you earn? / Hebrew

The Internet is full of courses about how easily you can earn tens or even hundreds of thousands of dollars in a couple of years, if you actively trade stocks, currencies, cryptocurrencies, commodities, binary options, with and without leverage.

You can find hundreds of people posting photos and videos of expensive cars, surrounded by beauties and handsome men from the USA/Milan/England, etc. Such materials are most often accompanied by the caption “another successful deal +80% to capital” or “raised in a month, 40% can be rested.”

It is quite difficult for a person without financial education to understand whether these people really earn so much? And if not all of them make money, then who is a fraud, and who should learn from? Let’s turn to scientific research and statistics.

A standard evening for a regular crypto investor

As in most cases, it is worth turning to logic and scientific research. Let’s start with research. And there were many of them. And until 2010, research was published both in support of speculative ideas and against them. However, at the moment, the point is made in studies that generalize past studies.

So, quotes from the research itself.

A 2019 Brazilian study of several tens of thousands of people:

  • 97% of day traders who traded the market for about 300 days lost money on their trades.

  • 99% of day traders lost money if they traded for more than a year.

  • The remaining 1% were low-earning, high-risk survivors, and this percentage of survivors decreased with increasing follow-up.

  • Only 17 people out of 20,000 earned more than the minimum wage in Brazil.

  • The more a person is engaged in intraday trading, the higher the chance of losing all their funds. That is, there is no learning during long-term activity (which is typical for most professions). Such behavior typical for casinos or others gamblingin which results are random and do not depend on skills the player

A huge study from Taiwan from 1992 to 2006 on hundreds of thousands of people:

  • Even the most experienced intraday traders often lose money.

  • Surprisingly, even those traders, which constantly lose, continue to tradedespite his losses.

  • For potential day traders, “trading to learn” is no more rational or profitable than playing roulette to learn.

  • Only 0.8% 450,000 traders have been able to profit for quite some time.

  • Only 0.11% traders of 450,000 people were able to make long-term high profits (over 100% per annum). But the excess income of many of them, based on the analysis of their operations, is explained by the use of insider information or receiving news data faster than other traders.

  • Success 0.06% traders, who were not suspected of insider data, is explained by the fact that these are experienced hired professionals from the world’s leading financial institutions, with huge connections, the latest mathematical developments and a large staff.

Research by the “US Securities and Exchange Commission” on the success of trading on the Forex market (leveraged currency trading) over 17 years:

  • Approximately 70% of traders lose money every quarter and on average 100% of forex traders’ investments are lost in less than 12 months.

  • Many large forex firms have a high-frequency communication system with market makers. They inform the market maker which applications have come from the clients of the forex firm, which means they can be executed according to at the worst prices.

  • Retail FX deals are like gambling.

A comparison from 1991 to 1997 of passive investing, picking individual stocks, and buying and selling stocks several times a month (swing trading):

  • Passive investors lagged the stock indices by an average of 1.1% per annum, through commissions and taxes.

  • Those investors who picked individual stocks lagged the stock indexes by 3.7% yearly

  • Those who made purchases and sales several times a month were considered active traders lagged behind the broad market by 10.3% per annum (i.e. most often were closing trading year in the minus).

  • Active investment strategies will outperform passive investment strategies. Those who trade the most suffer the most.

Is it possible to make money by speculation or day trading? So.

Do you have a chance to make money if you are not a math genius with several educations and backing from a leading investment bank with a staff of subordinates? No.

Now that the research is over, let’s add some logic. We need it very much, because people are attracted not only to speculative trade, but also to various projects that promise from 30% per annum (from 2% per month) and more. They are often disguised as a real business, such as “invest in the construction of a sugar factory”, “become a partial co-founder of a large real estate business for $1,000″ and banal. a large sum”.

Compound interest formula

There is no need to be afraid, everything is simple. Suppose someone promised you to take money from you and pay you back 5% in dollars every month. There are 12 months in a year. To find out how much you will earn in a year, we use the part of the formula above, which is in round brackets, namely (1 + 0.05)^12 = 1.796, or +79.6% per annum.

In the vast majority of countries in the world, the bank loan rate ranges from 2% to 16%. Thus, it is much more profitable for this “someone” to take a loan from banks than to borrow funds from many small investors.

So, a simple rule can be deduced:

if you are offered an income significantly higher than the bank loan rate, it is unlikely that they are going to give you money at all.

And what about investment gurus who are ready to drown you in Instagram advertising? Some really believe that they can teach you how to make money. Earnings from the sale of investment courses allow them to fly on vacation much more often than ordinary people and take cool photos. And they may subconsciously not notice losses on their own accounts, because they also have profitable periods, which they immediately rush to brag about publicly. This effect has been studied in detail in this study. “Previous success or failure does not change people’s desire to make deals again and again. The self-confidence and subjectivity of 95% of those who have tried speculation will lead them to speculate again within a year.”

Investment gurus who understand the futility of their courses are much more dangerous. Such people select their materials in advance so that they cannot be exposed as a fraud and can operate for decades. The author of this text knows about a dozen people both in the CIS and in Western countries who have been conducting such activities since the beginning of the 2000s and often emphasize their “longevity” in their advertising campaigns.

However, a very convenient rule can be deduced here. Suppose a guru promises to teach you how to make 5% every month. As we found out earlier, this is 79.6% per year. And this is (1 + 0.05) ^ (12 * 5) = 18.68, or +1.869% in 5 years. The investment guru clearly has at least $100,000 in reserves. Using $100,000 over 5 years, it will turn it into $100,000 * 18.68 = $1,868,000. And over 10 years, this amount turns into $34,891,199.

Do you need such a master of the market, who will become a millionaire in 5 minutes, will teach you for a couple of thousand dollars? The answer is obvious.

Successful success. It does not include the ability to make profitable trade deals.

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