The Science Behind Day Trading as Gambling

The Science Behind Day Trading as Gambling

Day trading is a type of trading where individuals buy and sell stocks within the same trading day, hoping to profit from the price movements of the stock. It has gained popularity in recent years, but many financial experts warn that it’s more akin to gambling than investing. In this blog post, we’ll explore why day trading is considered gambling and what scientific studies have to say about it.

Firstly, let’s define gambling and investing. Gambling is defined as risking money on an event that is completely random, while investing is defined as committing money to an enterprise or project with the expectation of obtaining an additional income or profit. In gambling, the outcome is purely based on luck, whereas investing involves analyzing a company’s financials, management, and other factors to make an informed decision about the potential success of the investment.

So, why is day trading considered gambling? One reason is that day trading relies heavily on short-term price fluctuations, which are highly unpredictable and difficult to forecast accurately. In fact, studies have shown that even experienced traders struggle to consistently make a profit from day trading.

A study published in the Journal of Finance in 2000 found that day traders lose money, on average. The researchers analyzed the performance of day traders over a five-year period and found that over 80% of them lost money. The study also found that the traders who did make a profit were only able to do so because of their experience and skill, rather than any inherent advantage in day trading.

Another study published in the Journal of Applied Finance in 2011 analyzed the performance of day traders in Taiwan and found similar results. The researchers found that only 9.81% of day traders were able to make a profit, while the rest either broke even or lost money.

These studies show that day trading is not a reliable way to make a profit and is more akin to gambling. The short-term nature of day trading means that traders are essentially making bets on the direction of a stock’s price, rather than making informed investment decisions based on a company’s financials and potential for growth.

Additionally, day trading can be addictive, leading traders to take unnecessary risks and make impulsive decisions. A study published in the Journal of Gambling Studies in 2015 found that day traders exhibit characteristics similar to those of problem gamblers, including chasing losses and taking bigger risks to make up for losses.