The Cross-Section of Speculator Skill: Evidence from Day Trading
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What they found
The definitive large-sample study of day traders. Using all day trading on the Taiwan Stock Exchange from 1992 to 2006 (hundreds of thousands of individuals), the authors found that the vast majority of day traders lose money after costs, but that a small group shows persistent skill: traders with strong past performance continued to earn positive net returns, with the top few hundred earning meaningful profits. Less than 1% of day traders were reliably profitable after fees, and past performance was the best predictor of future performance.
What you can use
- Day trading skill exists but is extremely rare: well under 1% of day traders earned reliably positive net returns.
- Skill persists: the traders who did well last year were the ones who did well this year, so your own track record is informative.
- The average day trader lost money, and heavy traders lost the most; volume is not a sign of skill.
- New day traders who lost money mostly kept trading, which is the behavior that funds the winners.
Caveats
Taiwan's market structure and transaction tax differ from the U.S. Skill was measured on a population of hundreds of thousands; a small sample of individuals cannot replicate this test. The profitable group is tiny in absolute numbers.
Tags: retail, day-trading, skill, persistence, taiwan
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.