Nearly everyone has heard the famous 90/90/90 rule: 90% of traders lose 90% of their capital within 90 days. Simply put - most likely you will lose 90% of your capital within the first 90 days of trading.
There are several versions of that "rule" that could be applied to individual traders.
The question is - where does such a claim come from? Most likely you won't find a coherent answer from Google either.
So, I asked ChatGPT: “who invented the 90% rule in trading?” and received the following response:
"The "90% rule" in trading is a concept that suggests that approximately 90% of day traders lose money in the markets. While it's a commonly cited statistic in trading literature and discussions, it doesn't have a specific inventor or originator. Instead, it's based on observations and analyses of trading data and patterns over time.
The idea behind the 90% rule is often used to caution traders about the challenges and risks associated with day trading, emphasizing the importance of education, risk management, and discipline in trading endeavors. It's frequently referenced in trading books, articles, and discussions within the trading community as a reminder of the high failure rate among day traders."
Looking at the answer - it becomes clear that all this regards to DAY TRADERS.
Day traders are statistically easy to identify - they are traders who open and close transactions within one day. Therefore, it is relatively easy to collect statistics about them. And generally speaking, I am pleasantly surprised with the AI’s answer since the main emphasis in this response is placed on the need for education, risk management, and discipline.
Diving deeper into the depths of the internet and looking for a clear answer, I came across this.
"Do Day Traders Rationally Learn About Their Ability" is a 2017 research on the performance of and learning by individual investors who engaged in day trading in Taiwan from 1992 to 2006 by a group of scientists from the Haas School of Business, University of California, Berkeley (USA), and the Guanghua School of Management, Peking University (China).
Here are some valuable insights from this research:
- The majority of day traders quit relatively quickly (more than 75% of all day traders quit within two years)
- Inconsistent with models of rational speculation and learning, we document that the aggregate performance of day traders is negative, that the vast majority of day traders are unprofitable
- Unprofitable are more than 95% of day traders.
- day trading makes consistently around 20% of the total trading volume
- only 9.81% of day trading volume is generated by predictably profitable day traders.
- in the average month, individual investors account for over 99% of all-day traders.
Since this unveils some issues regarding trading, I would like to elaborate a bit more about each of these fact-based insights:
“The majority of day traders quit relatively quickly (more than 75% of all day traders quit within two years)”
We all know some people, even within our circle of acquaintances who change their jobs very often, and their CVs look both impressive and amusing at the same time.
So, they rush into new ideas, and new projects with great enthusiasm, naively believing in the next BIG THING (everything). Nevertheless, this enthusiasm evaporates with the same speed as well, neglecting everything that seemed important just a few months, weeks, or even days ago.
But life goes on and new things and new interests appear again, giving some steam to a new circle of BIG THING that includes a period of enthusiasm and a sense of failure at the end.
Far less are people who stick to specific projects, goals, or big ideas in the long term. Those are rather rare ones who approach things seriously and delve into all the necessary details. You probably already guessed that they are also those who achieve much, much more in their life.
Then why should trading be any different? The overall human nature, emotions, and temper of a particular person reveal itself in trading even better than in any other environment.
Additionally, everything happens much faster in trading and I believe that trading (especially day trading) is a particularly hard job! This is an industry where only the strongest and most emotionally resilient can truly survive!
“Inconsistent with models of rational speculation and learning”
This is another "classic". Even in everyday life, many people feel like experts in many different matters. Especially many of these "experts" can be found on the Internet, in the comment sections.
During the COVID pandemic, a large number of these "experts" all of a sudden became medical experts. Now when Europe is torn by war, we have even more military experts.
In reality, there are very few real experts and specialists with relevant education and experience in some particular field, and the same applies to trading. Why this should be any different?
“Unprofitable are more than 95% of day traders”
After reading all the above-mentioned facts, does this number surprise you in any way? How many really successful people do you know from your circle of acquaintances? How many have successful businesses? How many companies survive in the long term and become large, stable industry players?
I strongly doubt that these numbers differ in percentage. For example – according to Charles Schwab's 2023 Modern Wealth Survey, the average American equates being wealthy with a net worth of approximately $2.2 million. This brings to this - The top 2% of Americans have a net worth of about $2.472 million.
So, statistically, the trading figures are not that far different from the daily statistics of our society.
“Day trading makes consistently around 20% of the total trading volume”
These wrongly executed short-term trades account for 20% of total trading volumes. With the rapid growth of the Internet and various tools and forums, there are so many "super smart and talented traders" who are ready to teach all the secrets of day trading and appear more and more day by day. I presume that this figure of 20% most likely will grow in the near future.
“Only 9.81% of day trading volume is generated by predictably profitable day traders.”
This fact shows that those traders who are successful (absolute minority here) make fewer transactions. And the previous fact - that day traders are responsible for 20% of the total trading volumes, shows that a large number of day traders have a problem with "overtrading".
These figures seem very real and believable to me.
Why?
Because I sometimes suffer from overtrading from time to time, and I know that feeling that you are just starting to "sit on the charts" too much – you are starting to see what YOU WANT to see there, not what it actually is.
You want to trade so much that you tend to see "deals" where there are none.
That’s why you should repeat this mantra by Warren Buffet whenever you have the urge to overtrade.
According to my trading data, I know very well that the majority of my profit comes from a small part of successful transactions. In trading, as in other sectors, the Pareto principle works very well - 20% of transactions bring 80% of the results. And it seems that profitable traders understand this very well and make transactions less often, but more efficiently.
The following regulation also confirms all this:
To help protect novice investors from large losses, the Financial Industry Regulatory Authority, or FINRA, created the pattern day trader, or PDT, rule. According to FINRA rules, you’re considered a pattern day trader if you execute four or more "day trades" within five business days.
In order for you to engage in day trading, you must have at least USD 25,000 capital. If you have less capital than that, the broker must identify your activities and if you do not meet the PDT (Pattern Day trading) criteria, your account will be frozen for 90 days!
Knowing all mentioned above facts there is no surprise that there is such a regulation. If a person himself does not understand that it is a dangerous activity, then restrictions must be placed.
So, all these regulations are aimed at "individual investors". This is also confirmed in the above-mentioned study "Virtually all day-trading can be traced to individual investors".
In my opinion, day trading is a very, very difficult and time-consuming activity. Besides, quite appalling statistics, and you need to spend a lot of your time in front of screens: analyzing short-term movements, making quick decisions, and so on.
Not everyone is capable of doing it. So, I don't think there's any point in dealing with it. This is not for me.
That's why my response to the question I wrote in my headline: "Why Swing Trading?"
IMHO, swing trading is the golden middle ground. Long-term investments are to all those who deal with real estate development and pension funds, facilitating capital growth in the long term.
However, stock markets make some significant movements usually already in a period of a couple weeks or months.
That's mid-term!
Why sit in front of the screen for days, doing a lot of small transactions? Why not focus on movements that can produce much greater contribution, only in a slightly longer period than day trading? Besides, without the need to spend all day in front of screens. The time savings are huge!
If you have done the analysis and have successfully opened a deal - all you have to do is monitor the result.
Master your mid-term trading system and don't waste your time on short-term moves!
Swing trading is also much less stressful, and easier to manage. Taking all of the above into account, I am a swing trader and I recommend it to everyone who wants not only to make money but live. Not after a few years in the future but already today.
Stay tuned!
Agris
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