There’s a well-known aphorism that goes something like this: “What men can do, women can do better”. Although the maxim is sometimes frowned upon for being sexist, or maybe for stretching the truth—and maybe even for being the truth–it does seem to apply with alarming alacrity in some circles. And guess what? Trading is one of them.
There’s a growing body of evidence that proves that women not only excel in day trading, traditionally regarded as a man’s job, but also routinely outperform their male counterparts.
Trading website FinTrader recently announced that the percentage of women engaged in trading and spread betting has been on the rise. The firm says that 25% of its clients are now women, up from virtually zero two decades ago. And judging from the company’s data, women are on average better traders than men.
FinTrader has posited five reasons why women make better traders than men:
- Men naturally hate to be wrong, and take longer than women to admit when they have made an error.
- Women tend to be better in a crisis and seem to be able to control their emotions in such situations better than men. Female traders are more disciplined and less prone to panic when things fail to go their way.
- Women can say ”No” more easily than men. Sometimes the best trades are those that are not taken.
- Women tend to adhere to a strategy more strictly than men do, and are more willing to ask questions when they encounter things they do not understand.
- Women think more carefully before initiating a trade as opposed to men who are prone to jumping in head first.
Men Take More Unnecessary Risks Than Women
These findings seem to correlate with results from similar studies done elsewhere. But perhaps the biggest kicker here is that men make worse traders than women simply because they tend to be overconfident and are far more prone to breaking the rules.
Financial Skills is a trading company that was founded by a group of Merrill Lynch ex-traders. The company runs real time simulation software. 326 interns at investment banks traded on its system in 2014. The company then combined the trading data they received with historical data from 400 trading juniors from previous years.
The junior traders, both men and women, lost money on their first year of trading, which is pretty standard for first-year investment bankers. But women traders lost significantly less money than men traders.
Men vs. Women First-Year Trading Returns
The firm chalked up the larger losses to men breaking the house rules much more often than women did.
Traders participating in the simulation exercise were strictly required to follow certain set times for conducting their trades, including first thing in the morning, for an hour during lunch break, and after 5pm. Nobody monitored the traders physically in an attempt to mimic real-life situations as closely as possible. Perhaps not surprisingly, the study found that men traders broke the rules 2.5x more frequently than women traders did.
Despite being less profitable than their female counterparts, male traders also placed a higher volume of trades than women, leading to higher brokerage fees and settlement costs. The study also found that men were significantly worse at short-selling than women.
Other studies that used large samples have arrived at a similar conclusion. Distinguished behavioral economists Brad Barber and Terrence Odean are renowned for their seminal research piece ”Boys will be Boys: Gender, Overconfidence, and Common Stock Investment.”
In 2001, the pair published a study of 35,000 households at a large brokerage firm that it compiled between 1991-1997. They came up with findings that men traded 45% more frequently than women, a practice that lowered their net returns by 2.65% per year compared to 1.72% per year by women, nearly a whole percentage point worse. They attributed this hyperactive trading to overconfidence by men.
Going by these findings that suggest that women make better traders than men by many metrics, it’s surprising that women have not widely embraced day trading. Women are less confident (or less overconfident, if you like) than men, something that tends to favor their odds in trading. Part of this is psychological, part cultural, and maybe even biological. A woman trader typically won’t place a trade until her confidence in the move is quite high. Women don’t take less-than-perfect setups as often as men do, which significantly increases their winning percentages.
There’s another less discussed aspect of why women excel more in trading than men do: dedication. Women who choose to take up day trading as a career are small minority and are typically much more dedicated at succeeding. Many men go into day trading with an I-will-give-it-a-shot mentality. Women traders on the other hand tend to give it their all including putting in enough time, practicing the right trading strategies, closely following a mentor’s advice, and investing enough capital.
Cory Mitchell, a woman day trader who formerly worked at a day trading firm from 2005-2010, says that her personal experience proves that women do indeed make better day traders. Cory says that over a five-year period, 300 interns comprising10 women and 290 men joined their trading firm for training. Four of those women proceeded to become successful day traders (40% success rate) compared with 10 out of 290 men (3.4% success rate). Cory says women traders at their firm did not make as much money as the top male traders, but were on average more consistently successful. The much higher success rate by women seems to suggest that the few women who take up day trading as a career are much more serious about succeeding than their male counterparts.
Cory also underscores the importance of having a mentor and sticking to the right strategies. According to her, having a mentor can double your odds of succeeding in day trading from the average of 3.5%-4.5% to 8%-10%. Having an exceptional mentor can increase your odds quite dramatically to 25%.
Experience Trumps Youth
FinTrader also made other interesting findings. The firm says that when it comes to trading, age and experience trump youth and novelty. Older traders share many of the desirable traits listed above with women, and consequently tend to be more successful than younger traders.
And that’s not because silver surfers do not take risks. Far from avoiding risks, older traders tend to take just as many risks as younger folks, only that they take the right risks, are highly organized, and are very results-oriented. The result is that the over-55 set enjoys 40% better returns than their younger counterparts.
There’s obviously little that younger traders can do about their age. But they can better their odds by finding a good mentor and following their advice. A good mentor can be a trader or a non-trader as long as they have an excellent grasp of the mechanisms of day trading.
But ultimately, a day trader must do it their own way since a mentor cannot trade for them. The best chance of long-term success in day trading lies in sticking to the basics:
- Have the 3 E’s; entry price, exit price, escape price
- Avoid trading during the first 15 minutes after the opening bell
- Use limit orders not market orders
- Rookie traders should avoid using margins
- Have a good selling plan
- Keep a journal of all your trades
- Practice trading in a paper-trading account
- Never act on tips from uninformed sources
- Learn how to cut your losses
- Be willing to lose before you can win
Anybody, men or women, can become successful at day trading if they have the necessary discipline. What trips up many people is relying on their emotions, which is why it’s important to create a set of flexible rules and follow them to keep you on the right side of any trade. If you’re wondering how to get started with the Stock Market, check out our quick tips to getting started.