Is Day Trading Profitable? How To Get Started

A day trader’s income varies and depends on the myriad trading strategies, risk management practices, and amount of capital available. In March 2023, the average day trader’s annual salary ranged between $34,000 and $96,500.1

Whether choosing stocks, options, futures, commodities, or currencies, day traders enter and exit positions within the same day. Losing money is common for day traders as many individual investors hold undiversified portfolios and trade actively, speculatively, and often to their detriment.2

Day traders commonly incur high brokerage fees, so selecting the best broker and creating a manageable trading strategy with proper risk management is essential.

Key Takeaways

  • Day traders rarely hold positions overnight and attempt to profit from intraday price moves and trends.
  • The vast majority of day traders lose money, reflecting the activity’s risk.
  • The factors that determine the potential upside of day trading include starting capital amount, strategies used, the markets in which you are active, and luck.
  • Experienced day traders tend to take their job seriously, are disciplined, and stick with their strategy.
  • Successful day traders manage risk by using stop-loss orders and establishing profit-taking points.

What Day Traders Do

Day traders typically target stocks, options, futures, commodities, or currencies (including crypto). They enter and exit positions within the same day (hence the term day traders). They hold positions for hours, minutes, or even seconds before selling them. They rarely hold positions overnight.

The goal is to profit from short-term price movements. Day traders can also use leverage to amplify returns. Of course, leverage can also amplify losses.3

Setting stop-loss orders and profit-taking levels—and avoiding too much risk—is vital to surviving as a day trader. Professional traders often recommend risking no more than 1% of your portfolio on a single trade. If a portfolio is worth $50,000, for example, the most to risk per trade is $500.

The key to managing risk is to prevent one or two bad trades from wiping you out. If you stick to a 1% risk strategy, set strict stop-loss orders, and establish profit-taking levels, you can limit your losses to 1% and take your gains to 1.5% or above. However, this takes discipline.

Example of a Day-Trading Strategy in Action

Consider a strategy for day-trading stocks in which the maximum risk is 4 cents and the target is 6 cents, yielding a risk/reward ratio of 1-to-1.5. A trader with $30,000 decides that their maximum risk per trade is $300. Therefore, 7,500 shares on each trade ($300/4 cents) will keep the risk within the $300 cap (not including commissions).

Here’s how such a trading strategy might play out:

  • 60 trades are profitable: 60 × $0.06 × 7,500 shares = $27,000.
  • 45 trades are losers: 45 × $0.04 × 7,500 shares = ($13,500).
  • The gross profit is $27,000 — $13,500 = $13,500.
  • If commissions are $30 per trade, the profit is $10,350, or $13,500 — ($30 × 105 trades).

Of course, the example is theoretical. Several factors can reduce profits. A risk/reward ratio of 1-to-1.5 is fairly conservative and reflects the opportunities that occur all day, every day, in the stock market. The starting capital of $30,000 is also just an example of a balance with which to start day-trading stocks. You will need more if you wish to trade higher-priced stocks.

Earning Potential and Career Longevity in Day Trading

An important factor that can influence earnings potential and career longevity is whether you day- trade independently or for an institution such as a bank or hedge fund. Traders working at an institution don’t risk their own money and are typically better-capitalized. They have access to advantageous information and tools.

Some independent trading firms allow day traders to access their platforms and software, but they require them to risk their own capital.

Other important factors that can affect a day trader’s earnings potential include:

  • Markets in which you trade: Different markets have different advantages. Stocks are generally the most capital-intensive asset class. Individuals can start trading shares with less capital than with other asset classes, such as futures or foreign exchange.
  • How much capital you have: If you start with $3,000, your earnings potential is far less than someone who starts with $30,000.
  • Time: Few day traders achieve success in just a few days or weeks. Profitable trading strategies, systems, and approaches can take years to develop.

The maximum that rules permit a pattern day trader to trade in excess of the $25,000 maintenance margin.4

Day-Trader Salary

Whether they’re trading for themselves or working for a trading shop and using the firm’s money, day traders typically don’t get paid a regular salary. Instead, their income is derived from their net profit. These profits include what’s left over after deducting trading fees and commissions, the cost of trading software or connections to exchanges, and any “seat fee” paid to a trading firm.

A day trader can have dry spells or experience volatility in their earnings. As a result, many trading firms offer instead a draw in lieu of a salary. This is often a modest amount of money meant to cover everyday living expenses and is drawn monthly. Then, any excess earnings are paid out in the form of bonuses. This also means that if you don’t make enough trading profits to cover your draw, you may end up owing the company money.

There is a great degree of variance in the average day trader’s salary, with some day traders making six figures and others losing money.5

How To Get Started in Day Trading

Getting started in day trading isn’t like dabbling in investing. Any would-be investor with a few hundred dollars can buy shares of a company and keep them for months or years.

However, the Financial Industry Regulatory Authority (FINRA) sets rules for those whom it defines as pattern day traders (those who execute four or more day trades within five business days in the same account). These rules require margin traders who trade frequently to maintain at least $25,000 in their accounts. What’s more, they can’t trade if their balance drops below that level.4

This means that day traders must have sufficient capital on top of the $25,000 to make a profit. Plus, day trading requires focus. It’s not compatible with simultaneously keeping a day job.

Most day traders should be prepared to risk their capital. In addition to required balance minimums, prospective day traders need access to an online broker or trading platform and software to track positions, do research, and log trades. Brokerage commissions and taxes on short-term capital gains can also add up.

Aspiring day traders should factor all costs into their trading activities to determine if making a profit is feasible.

Similarities and Differences Between a Pattern Trader and Day Trader

Pattern traders and day traders have very similar roles. However, there are one or two differences between the jobs. Both pattern and day traders share similar trading strategies and market indicators to make their trading decisions. Also, they both trade quite frequently, at least four trades over five business days. From a regulatory perspective, once those minimum trading frequencies are met, traders are flagged as pattern day traders by their brokers.

Pattern and day traders are subject to minimum margin and maintenance requirements.

Yet there are differences between a pattern trader and a day trader. Pattern traders typically hold their positions over a few days up to several weeks. On the other hand, day traders close their positions within the same trading day. Based on the frequency of transactions, day traders would pay closer attention to the financial markets during trading hours. Pattern day traders would have a little more flexibility when it comes to monitoring the financial markets.

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