ForgeXWhat the research says
Does trading more often make you more money
66,465 households were tracked for six years. The ones who traded most earned 11.4 percent a year while the market returned 17.9 percent.
It feels like it should. More trades means more chances to be right, more opportunities taken, more work done. The largest study of individual investors ever run at the time found the opposite, and the gap was not small.
The finding
Brad Barber and Terrance Odean looked at "66,465 households with accounts at a large discount broker during 1991 to 1996". They found that "those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent" [1].
For comparison, the average household in the same data earned 16.4 percent and turned over 75 percent of its portfolio in a year [1]. So the average was already behind the market, and the most active were a long way behind it.
Where the money went
Not to bad picks, mostly. To costs. Every trade pays a spread and a commission, and those are charged whether the trade works or not.
This is the part that carries over to any market, including the ones with no commission. The spread is still there. A strategy that takes forty trades a month pays that cost forty times, and it has to clear that bar before it has made anything at all.
What to do about it
The lesson is not to trade rarely. It is that trade frequency is a cost you are choosing to pay, and it should be earning its keep.
That is testable on your own record. Take your results and subtract your costs, then look at whether your most frequent setup is actually the one making the money. Quite often the winning strategy is one you take a few times a month and the losing one is the one you take every day out of habit.
The authors put the cause down to overconfidence: people trade more when they think they know more than they do [1]. Whether or not that is the reason for you, the cost is the same and it is measurable.
Sources
- Barber, B. M. and Odean, T., "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors", The Journal of Finance, vol. 55, no. 2, 2000, pp. 773 to 806. https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00226