Knowledge
Beginner Core — 40 lessons chosen by one question: if you did not know this, would it blow your account? Free to read, no account needed. Lessons are in Thai.
If you only read four, read these
The four that actually prevent a blown account. Read them in any order.
Research
Articles from published research, readable on their own.
Three studies that change how you read your own account
This page summarises research published in the major finance journals, in plain language, with a note on what each finding is worth to your own account.
Every figure comes from the paper cited at the foot of that article. None of them is there to sound impressive. Where the research contradicts what a course seller says, the research is what we wrote down.
The more you trade, the less you keep
In 2000, two researchers at the University of California got hold of what finance had wanted for years: the real accounts of real people. Not a survey, not a simulation. A large discount broker opened the trading records of 66,465 households, covering 1991 to 1996.
Their question was simple. Do people who trade more often end up ahead of people who mostly sit still?
What the numbers said
- The average household earned 16.4% a year
- The market over the same period returned 17.9% a year
- The most active fifth earned just 11.4% a year
- The average household turned over 75% of its portfolio a year
The hardest-working group in the sample lost to the market by 6.5 points a year, having spent the most time on it
A gap of 6.5 points a year is not a rounding error. Compounded over a decade, a million growing at the market rate becomes roughly five million; the same million growing at the active traders' rate becomes roughly three. Two million gone, and the owner worked harder for it.
Why it happens
The paper points at two things working together.
The first is cost. Every open and close is paid for. In equities that is commission and the spread; in forex it is the spread and the swap. Per trade it is small enough not to register. Multiplied by the number of trades, it is the year's return.
The second is overconfidence. A trader who wins two or three in a row tends to conclude they have got better, when the honest reading is often chance. Feeling better leads to trading more, which raises the cost, which lowers the return further.
What the study does not say matters just as much. It does not say trading is a mistake, and it does not say these people picked badly — their selections were reasonable. What cost them the return was the frequency, not the choosing.
What to do with it
- Count your trades per month over the last three months. If you have never counted, the number is usually higher than the one in your head.
- Work out your total cost as a percentage of the account, per year. Add up spread and fees and divide by account size. Above 5% a year, cost is eating the return.
- Separate the trades you took from a plan from the ones you took because you saw something. The ratio between those two tells you more than the monthly profit does.
Source: Barber, B. M., & Odean, T. (2000). Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. The Journal of Finance, 55(2), 773–806.
Cutting winners early, holding losers late
If you have ever closed a trade 20 points in profit when the plan said 60, then watched it run to 80 the next day — and if you have ever held one 100 points down while telling yourself it will come back — both of those have a name, and somebody has measured them.
In 1998 Terrance Odean took 10,000 real accounts and asked one question. When people decide to sell, do they sell the position that is up or the one that is down?
What the numbers said
- Investors sold winners about 1.5 to 2 times more readily than losers
- Rebalancing does not explain it
- Avoiding the higher costs of low-priced stocks does not explain it
- And afterwards, the positions they sold — the winners — outperformed the ones they kept
People sold what they should have held and held what they should have sold, and the market went on to prove it
The behaviour had been named earlier, by Shefrin and Statman in 1985: the disposition effect. Odean's contribution was to show, with real records, that it is there and how large it is.
Why the mind does this
The explanation with the most support is prospect theory, from Kahneman and Tversky. In short: losing one unit hurts more than gaining the same unit pleases.
While a trade is up, closing it turns a number on a screen into a fact — and into a fact that says I was right. The mind wants that confirmation, and wants it soon.
While a trade is down, closing it means accepting I was wrong. Until it is closed it is still an unfinished number, and the mind will pay a remarkable amount to postpone that feeling.
This is why being told to have discipline changes almost nothing. The problem is not knowledge — everyone knows losses should be cut. The problem is that in the moment, not cutting hurts less.
What to do with it
- Decide before you enter, not while you hold. Set the stop and the target before the order goes in. That is the only moment when there is nothing yet to hurt.
- Measure yourself with numbers. Count how many winning trades and how many losing trades you closed last month, against how many of each you were holding. If those two proportions are far apart, you are looking at the thing the study found.
- Let the system do the closing. The real advantage of trading through a system or an expert advisor is not speed. It is that a losing position means nothing to it. It closes because the condition was met, not because it has finished coming to terms with it.
Sources: Odean, T. (1998). Are Investors Reluctant to Realize Their Losses? The Journal of Finance, 53(5), 1775–1798. · Shefrin, H., & Statman, M. (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long. The Journal of Finance, 40(3), 777–790.
Can you actually make a living at it?
This is hard to answer because the data hides. People who succeed talk about it; people who quit are never interviewed. What is left is a picture that tilts positive on its own.
In 2020 three Brazilian researchers got around that by asking the exchange instead of asking people. They followed everyone who began day trading on the Brazilian equity futures market — third largest in the world by volume — between 2013 and 2015, and tracked what happened to each of them.
The important part is that they focused on the people who kept at it for more than 300 days. Not the ones who tried it and stopped. The serious ones.
What the numbers said
- Among those who persisted beyond 300 days, 97% lost money
- Only 1.1% earned more than the Brazilian minimum wage
- Only 0.5% earned more than a bank teller's starting salary — and took considerable risk doing it
You get better the longer you do it does not appear anywhere in this data
How to read that number
The wrong conclusion is trading loses money, do not do it. The study does not say that.
The closer conclusion is that short-term trading, full time, as the thing that replaces a salary, is something most people do not succeed at even after years of trying — which is a different proposition from trading as part of managing money while income comes from somewhere else.
That distinction matters, because what breaks people is usually not skill. It is the pressure of needing a profit this month. Somebody whose rent depends on this week's result will hold the trade that should be cut and size up at the moment they should not.
The other thing to watch for is listening only to the survivors. People who did well exist in this sample — roughly one in two hundred — and they are the ones who go on to tell you about it. The other hundred and ninety-nine tell nobody anything.
What to do with it
- Do not risk income you have already spent. If this month's profit is next month's mortgage, every decision gets bent without you noticing.
- Count the opportunity cost too. Four hours a day on trading that returns less per year than those four hours would earn elsewhere is a loss, even when the account balance is positive.
- Set the deadline before you start. Decide up front how many months you will give it and what result counts as failing. People who set the deadline after starting move it every time.
Source: Chague, F., De-Losso, R., & Giovannetti, B. (2020). Day Trading for a Living? SSRN Working Paper.
What these three studies cannot tell you
Read the above knowing where it stops.
All three studied foreign markets. The first two are US equities in the 1990s; the third is Brazilian futures in the 2010s. None of them studied forex, and none of them studied Thai traders.
What carries across is human behaviour: costs accumulating from frequent trading, confidence rising after a run of wins, and the pain that stops people cutting a loss. None of those depend on what is being bought and sold.
What does not carry across is the specific numbers. A 17.9% annual market return belongs to US equities in that period. It is not a figure to expect anywhere else.
All photographs on this page are from Pexels and are free to use without attribution.