Do Individual Day Traders Make Money? Evidence from Taiwan

Abstract:     
When an investor buys and sells the same stock on the same day, he has made a day trade. We analyze the performance of day traders in Taiwan. Day trading by individual investors is prevalent in Taiwan - accounting for over 20 percent of total volume from 1995 through 1999. Individual investors account for over 97 percent of all day trading activity. Day trading is extremely concentrated. About one percent of individual investors account for half of day trading and one fourth of total trading by individual investors. Heavy day traders earn gross profits, but their profits are not sufficient to cover transaction costs. Moreover, in the typical six month period, more than eight out of ten day traders lose money. Despite these bleak findings, there is strong evidence of persistent ability for a relatively small group of day traders. Traders with strong past performance continue to earn strong returns. The stocks they buy outperform those they sell by 62 basis points per day. This spread is sufficiently large to cover transaction costs.

Keywords: day traders, individual investors, market efficiency

JEL Classifications: G12, G14

Working Paper Series