Lessons › Why traders lose › Trade more, earn less
World 11 · Why traders lose · lesson 14 · level 1
Trade more, earn less
Every trade pays a fee in, a fee out and the price gap, so trading more mostly means paying more: the busiest traders earned the least.
In one line
Trading more feels like working harder. But in a study of 66,465 real households, the busiest traders earned the least.
Explained simply
Every trade has a price: a fee to get in, a fee to get out, and the spread, the small gap between the price you can buy at and the price you can sell at. Trade twice as often and you pay all three twice as often. Researchers followed 66,465 households from 1991 to 1996. The busiest fifth, the ones who traded most, earned 11.4% a year. Just buying the whole market and holding it earned 17.9%. The researchers point to overconfidence: feeling more sure than the facts allow. A trade you skip costs nothing.
A worked example
An example with the study's numbers: the market earned 17.9% a year and the busiest traders 11.4%. The gap is 17.9 − 11.4 = 6.5 points, and 6.5 ÷ 17.9 = 0.363. So doing more cost them about 36% of the market's return, over a third.
Mistakes to avoid
- Feeling that more trades means more work, and more work means more money.
- Counting the fees but forgetting the gap between the buy and sell price.
- Taking an unplanned trade because this one feels like the sure one.
Check yourself
In the study of 66,465 households, who earned the least?
The ones who traded the most. The busiest fifth earned 11.4% a year, while just holding the market earned 17.9%.
Which costs does every trade pay?
A fee in, a fee out, and the buy-sell price gap. You pay to get in, to get out, and the gap between the buy and sell price. Trade twice as often and you pay all three twice as often.
Each trade costs you $2 in fees, in and out. You go from 10 trades a week to 20. What happens to your weekly fees?
They double, from $20 to $40. 20 trades × $2 = $40, twice as much. The gap between the buy and sell price comes on top.
What did the researchers point to as the reason people trade too much?
Overconfidence: feeling more sure than the facts allow. Each trade feels like the sure one. The feeling is free; the trades it produces are not.
The busiest traders earned 11.4% a year; the market earned 17.9%. How much of the market's return did they give up?
About 36% of it, over a third. The gap is 17.9 − 11.4 = 6.5 points, and 6.5 ÷ 17.9 is about 36%. Making money is not the test; keeping up with just holding is.
Goal of this lesson: Count your trades for one week, then allow half as many and keep only the ones you planned in advance.