How Much Do Day Traders Make?

Before someone applies for a job, they typically do research on what they can earn from working in that position. Some wages are easier to figure out than others.

With something like day trading, answering the question of how much you can make isn’t overly straightforward. In fact, the sources you look at can end up being contradictory. Why? Well, there is varying information concerning how much money you can make as a day trader on the web. Plus, there are very few videos and posts about traders generating enormous amounts of money in short periods of time.

Put simply, a good chunk of answers you get are not exactly concrete.

Trading income has an array of variables, that much we know. However, by using some basic research methods, it is possible for you to get a rough idea of what a day trader can make. And you can do so by drawing from their locale, starting capital, and employment status.

What is it?

Let’s start at the beginning with what ‘day trading’ is. Generally speaking, it is the purchase and sale of a security within the span of a single trading day. It can take place in pretty much any marketplace. With that being said, it is a common occurrence in two particular markets. One is the foreign exchange (forex) and the other is the stock markets.

For the most part, day traders have the proper education and funds to carry out their activities. They utilize excessive amounts of leverage and short-term trading strategies. With this, they are able to capitalize on even the smallest of price movements in highly liquid stocks or currencies.

Day traders are accustomed to events that trigger short-term moves in the market. Probably the most popular technique is what’s essentially trading the news. Announcements on a schedule – like economic statistics, corporate earnings, or interest rates – function on market expectations. Moreover, they are subject to market psychology. When there is a failure to meet these expectations or exceed them, markets will react. Oftentimes, this will be with sudden, significant moves that could potentially benefit day traders.

What it takes to be a day trader

Realistically, there are no special qualifications that are a requirement for becoming a day trader. Instead, the classification of day traders primarily draws from the overall frequency of their trading activities.

FINRA and NYSE categorize day traders by seeing whether they trade four or more times during a five-day span. That is to say, if the number of day trades surpasses 6% of the customer’s total trading activity during that period. Alternatively, if the brokerage or investment firm where they opened an account deems them to be a day trader. Day traders are typically subject to requirements concerning capital and margin maintenance.

A day trader will usually close all trades prior to the end of the trading day. Doing so will prevent holding open positions overnight. There may be a limit to the effectiveness of a day trader thanks to various factors. These include the bid-ask spread, analytics software, trading commissions, and expenses for real-time news feeds.

To be successful in day trading, the practice demands extensive knowledge and experience. Day traders use a wide range of methods in order to make the right trading decisions. There are some traders who will employ computer trading models that utilize technical analysis for calculating beneficial probabilities. Other traders will instead trade using nothing but their instinct.

The main concern of a day trader lies with the price action characteristics of a specific stock. This is in contrast to investors who use fundamental data for analyzing a company’s long-term growth potential. With that, they can decide whether to buy its stock, sell it, or hold it.

Different strategies

Below are some day trading strategies that traders commonly use:

  • On top of knowledge about basic trading procedures, it’s imperative that day traders keep up on the latest stock market news. Likewise, they must be up-to-date about events that affect stocks, like the Fed’s interest rate plans and the economic outlook. Do your homework and make a wish list of stocks that you would like to trade.
  • Assess the amount of capital you are willing to risk on each trade. Plenty of successful day traders risk less than 1% to 2% of their account with each trade.
  • Beginners should focus on a maximum of one to two stocks during a single session. Tracking and finding opportunities is a lot easier with just a handful of stocks. It is becoming progressively more common to trade fractional shares. Therefore, you can specify particularly smaller dollar amounts that you want to invest.
  • Day trading requires a lot of your time, hence the name “day trading.” As a matter of fact, you will need to give up a large portion of your day. You shouldn’t consider this as a career if you have limited spare time. The process requires a trader to track the markets and identify opportunities, which can emerge at any time. In this practice, moving quickly is key.
  • There will be times where the stock markets will put your nerves to the test. Your decisions as a day trader need to operate by logic and not by emotion.
  • Successful traders need to move fast, however, they don’t necessarily need to think fast. They develop a trading strategy in advance, as well as the discipline to stick to the plan. It is crucial that you follow your formula closely rather than make an attempt to chase profits.

Success and failure

Both trading success and failure are the amalgamations of what becomes of several trades. Suppose that your trading profits go on to exceed your trading losses. In this case, you are officially a profitable trader; basically, you are successful. Now let’s assume that the complete opposite happens. Your trading losses exceed your trading profits, then you are an unprofitable trader. Put simply, you are unsuccessful.

For this section, we will take a look at the odds of a trade.  Each and every trade comes with two possible outcomes: either a profit or a loss will happen. The realization of a profit occurs when the trade moves in your favor. On the flip side, the realization of a loss occurs when the trade moves against you. Whatever the outcome may heavily depend on the accuracy of your ability to forecast a stock’s price movement. Remember that you can predict price action in either direction; specifically up or down.

For this example, we will use long trades. Whenever you place a long trade, you are basically betting that the price of a stock will increase. With that in mind, what exactly are the odds of that actually happening?

The truth of the matter is that the odds will vary. However, for the sake of this example, let’s say that the odds are 50/50. Suppose that the odds of the price going up were to be anything less than 50/50. In this particular case, they would be in favor of the stock price decreasing. Moreover, you would have a beneficial short position. Thus, the 50/50 assumption is suitable for our example, theoretically speaking.

An important decision

It’s important to remember that if you decide to become a full-time day trader, you should not take it lightly. You will of course need to take the pros and cons of this choice into account. First and foremost, trading for someone else will give you the opportunity to utilize an array of tools and strategies. Hopefully, using these assets will prove to be a lucrative decision.

One of the advantages that come from trading for someone else is removing various pressures. One of which includes having to identify both a winning system. An additional positive is that you will have a mentor that can assist you along the way.

However, if you are not the right degree of profitability, then it is a different story. You should be ready to follow an extensive amount of rules. This level of governance regarding your trading activity stems from the fact that you are using someone else’s money. Therefore, you need to make money or prepare yourself for someone always telling you what to do.

One humongous upside of day trading for someone else is that you will receive a salary. This salary will likely not be enough to live on, but you still get a cheque. When you branch out on your own, there is no luxury of there being a salary. You are an investor who is banking on generating income. This is something that is important to remember and must be stated upfront.

Licenses

Let’s assume that you choose to work for the firm and are trading client’s money or conceivably interfacing with customers. In this case, you will need your Series 7 license, and possibly your Series 63 license.

  • Series 7: This will give you the license you need to trade. The exam cost is around $305 and, depending on the outfit, a firm will cover it.
  • Series 63: This is the next exam that you will need to take following the Series 7. This exam is what allows you to solicit orders for a stock within a perspective state.

An easy way of looking at this is that the 7 grants you the right to trade on a federal level. The 63 permits you to work within state law boundaries.

Trading with a company

For this section, we will use an infographic from TradingSim:

There is an obvious benefit that comes from trading with a company. As time passes, your buying power will gradually continue to increase. Moreover, you have none of the downside risks seeing as how it is the company’s money. The key is ensuring that you have a substantial amount of money under management.

The core component of generating serious cash is to start managing multiple funds at once. If you are able to pull that off, you will in turn generate an average salary of 576k per year. That number certainly looks appealing, doesn’t it? However, you must remember that it takes an effort to get you to the top of the mountain. Blood, sweat, and tears even.

Going off of the infographic, you can see that the average bonus is trending comparatively higher. Moreover, assuming that things go according to the forecast, it will inevitably surpass the recession peak. And this will likely occur in the near future. Because of this, if one of your objectives is to make a profit, then you are in the right industry.

A more middle-of-the-road kind of person can expect to make anywhere between 100k and 175k a year. A below-average trader should expect a pink slip, so to speak.

Trading for a prop firm

The best way to describe day trading for prop firms is that it is akin to living on the edge. Not unlike trading for a company, you will receive some training. Only when you complete this training will the prop firm allow you to trade with their money. Moreover, you will have access to their systems. This, however, is where the similarities between trading for a company and a prop firm start to diverge.

There likely won’t be any healthcare of paid time off and you will not have a base salary. There will also be a lack of annual reviews. It is a requirement from the prop firms that you deposit money in order for you to use their platform.

The advantages include the prop firm splitting profits with you anywhere from a third to roughly 50%. The disadvantages are a lack of salary and bearing a good portion of the pain on the subject of losses.

However, the main reason why prop firm traders generate less than those for the investment houses boils down to one thing. That being access to capital. Generally speaking, you are potentially trading the proprietary firm owner’s money. Because of this, there is a limit to the pool of funds that you have access to.

A trader for a prop firm that is “above average” has the capacity to make approximately 150k to 250k per year. The average trader will make a profit that falls between 60k and 100k. Underperformers will have an excessive number of position limits out onto their account. So much so that they are essentially practicing and not exactly making any serious money, if any. There is a good chance that these underperformers will remove themselves from the game. Unsurprisingly, practicing will not pay the bills.

Career longevity

Ultimately, there is a crucial factor that can have an impact on earnings potential and career longevity. That being whether you are an independent day trader or you trade for an institution. Such institutions can include a bank or a hedge fund.

Traders who work at an institution have the benefit of not putting their own money on the line. Furthermore, they are usually far better in terms of capitalization. They have easy access to valuable information and advantageous tools. Some independent trading firms, on the other hand, allow day traders to access their platforms and software. The difference, though, is that there is a requirement for traders to risk their own capital.

All in all, the most relevant factors that contribute to a day trader’s earnings potential include the following:

  • The markets you trade: Different markets will obviously have different advantages that come with them. Stocks are often the most capital-intensive asset class. Individuals are able to start trading with less capital with other asset classes, like forex or futures.
  • How much capital you possess: If you have $3,000 at the beginning, then your earning potential is considerably less than someone who starts at $30,000.
  • Time: Very few day traders will achieve success in a matter of a few days or weeks. Generally speaking, lucrative trading strategies, systems, and approaches will take years to reach full development.
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