The Majority of Day Traders Lose

It is well documented that the majority of spreadbetters lose money. Estimates vary between 80% and 90% lose. It is less well written that the majority of traders also lose money. That includes all types of trading - intraday, end of day and any market.

The North American Securities Administrators Association reports that only 11.5% of traders actually trade profitably over the term of their trading. At least 70% lose money and the balance breakeven. A large majority of losers will lose everything they invest (trading account). So a new trader has a 1 in 10 chance of winning. I trade three strategies that are quite simple. There are thousands of strategy combinations that will work but still only about 12% of traders will win over the long term.

On another level I've recently been reading a staggering report from the Taiwan Stock Exchange regarding intraday traders (stocks and futures). It was conducted by the University of Cailfornia with 925,000 trader accounts being studied over a four year period. That's 100% of all Taiwan day traders from the occasional dabbler to regular everyday traders. The traders were grouped depending upon their trading criteria.

Of all traders 82% lost.
Of the winners 100% were regular traders.
Of occasional traders most lost.
Those that lost over a six month period also lost over the next six months.
Those that won over a six month period also won over the next six months.
Of those who traded every day, those who traded aggressively lost overall.
Of those who traded every day, those who traded passively (fewer trades) won.
During any given month of 21/22 trading days London Capital Group will have an average 4 to 5 losing days.

Summary

Among listed spread betting companies, London Capital Group reported a sharp rise in the number of clients in 2008/2009, with the number of new accounts more than trebling.

Currently about 80% of all Capital Spreads clients lose. They lose on average £2600 per annum. They turn away large numbers of prospective clients, the ones they take on 'spend more on the golf course'. It's a hobby.
Up to last August longer term 'betters' made the most money, now it's the day-traders.
On average Capital Spreads clients spend 4.6 hours logged on a day (so loss per hour is small).
In the first half 2007 the average bet £pp was £6, in the second half it was £4.3p i.e. in difficult times people just risk less.
Their profit per client isn't falling, their cash position is improving (people putting more money in rather than winnings).

In general (so we are told) the spreadbet bookie doesn't make any greater profit from a losing bet than from a winning bet. But they do gain from the greater churn involved if tripped-out players keep returning to re-open stopped bets. One million people in the UK have tried spread-betting on movements in world stock markets. A surprising point that came out of this was the analysis by one of the consultants, Daniel Stewart (DAN:AIM), that only around 3% of those who spread bet actually short-sell company share prices (no wonder most spread betters are currently losing).

Simon Denham, MD of Capital Spreads does not shy away from exposing the risks for spread betting and leverage for the unwary -:

'For those who came along to our seminars I was renowned for pointing out time and again that for Private Clients trading in the financial markets is difficult and that some 80% lose money. This is not unique to spread betting but is also the percentage who lose using the direct access that so many commentators like to crow about. I have also repeated this statement many times. If trading was easy we would all be millionaires. If you look across the financial landscape why do you think that it is generally the brokers who own the yachts? The men in the middle always get their turn no matter which way the markets go. Spread betting providers make markets, we do not recommend any trades we merely give people the opportunity to make trades.'

'Even the most experienced day traders expect to make money on only about 30 to 40 per cent of their trades, says Simon Denham, a director with the firm Capital Spreads. But the flipside is these traders tend to make three to four times the average profit of punters on winning trades' he claims. 'My best advice to anyone is after three months, if you haven't made any money or it's not been worth the time and investment you put into it, then give it up,' concludes Mr Denham. 'Don't love your position because your position doesn't love you.'

Simon added 'We have made many statements to our investors stating that the average number of winning clients is about 21 per cent which is slightly better than the 18 per centof private clients trading on the CBOT/CME. Not only that but winning clients generally make more than more than 21pc of the trades as they tend to last longer! In 2008 the number of winners fell a bit but in 2009 the swing has gone the other way.'

The IG Index annual results in July made fascinating reading didn't they?

The best month for the year for IG was April 2008 because it was so volatile. Overall the year's revenue was up 51% at £184m
The average spread-betting customer is a 37-year-old bloke with disposable funds of between £10,000 and £50,000. ('Include me out' as President Eisenhower used to say).
Bad debts rose as more clients got financially wiped out. But as they jumped from their window ledges, IG's relentless recruitment campaign continued to pull in eager new replacements - 'the most significant driver of IG revenue growth'. Last year client numbers almost doubled.
Those new clients only cost around £150 to sign up but once on IG's books they s really deliver for IG - average revenue per client is £3,064.

In some market research (dated November 2009) by research specialist Investment Trends on the state and nature of the UK spread betting market it was highlighted that about 80% of frequent spreadbetters use technical analysis to decide their trades, disregarding fundamentals. Perhaps rather disturbingly in this research, 40 per cent of frequent traders stated that they rely on their instincts or gut feelings to make a decision.

So what's really happening here?

The research highlights an overreliance by spreadbetters on technical analysis which might explain the profession that most of these spread betters originate from: the financial and information technology industries. Technical analysis definitely has its place but is it wise to risk one's capital ignoring to take into consideration the economic and corporate fundamentals?

Apart from that, it is a fact that most people that getting involved with financial spread betting do so without any real plan. They just blindly throw their money in anything that seems to be going up or down (mostly up) and foolishly believe when they're losing money that the tide will turn so add more money to it, or trade the opposite direction. This is a losing strategy. There are ways to what is called 'Hedge' but don't do it blindly to recoup a loss. Before they know it they have lost their deposit, returned to the pub and complained that it's all a con. Let's get this straight - 80% of spread bets aren't losing bets or the spread betting providers would be changing the odds or narrowing the spreads in the clients favour because they don't want clients to lose everytime. It is 80 per cent of accounts that are net losers.

New traders need to learn and master one strategy be it fundamentals, a combination of technical indicators or basic price action. That is the easy part. The difficult bit is sticking solely to that strategy and not deviating. The instant you deviate you no longer have a strategy and are back to gambling. A new trader can spend years wasting time trying different strategies with different indicators and end up being back where they started. Strategies (including charts) don't make money. Discipline and money management make money. Given the relative unimportance of chart strategies I think they are sometimes given too much emphasis. It will only serve to confuse a new trader imo and lead them to concentrate on the wrong thing.

How to lose money on Spread Betting

Spread betting is very simple and, in some ways, its simplicity is the reason why so many traders lose money. It is very tempting to overtrade or to trade based upon emotion or gut feeling. Beginners also risk far too much of their capital on one trade and when it goes wrong have a tendency to "chase it", compounding their losses, until their capital is so depleted it is very difficult to recover. You can lose a lot of money with no risk control procedures in place.

So back to the key question - why do most spread betters lose? Too many bets, too many trades (overtrading), too few people putting stop losses in place and sticking with them (bad money management). Too little attention paid to moving those stops (discipline). so people are often closed out at the wrong time. Too little research done on companies you're putting the bets on. Forget not catching a falling knife.some people are betting on the knife once it's hit the floor and wondering why it won't drop any further. In short, the way you lose on any share trading - too much impulse and not enough research - that's how to lose on spread betting. Be a contrarion, understand herd behaviour, do your research and learn how to win your spread bets!