How much money does the average day trader make? The question is impossible to answer because few day traders disclose their actual trading results to anyone but the Internal Revenue Service. Results, moreover, vary widely given the myriad of different trading strategies, risk management practices, and amounts of capital available for day trading.

To be sure, losing money at day trading is easy. In a 2011 research paper titled "The Behavior of Individual Investors," Professors Brad M. Barner and Terrance Odean at the University of Calif., Berkeley revealed that individual investors who traded actively and speculatively without diversified portfolios typically lost money over time. Day traders can also incur high fees from transaction costs, so picking the right 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.
  • Day trading is risky but potentially lucrative for those that achieve success.
  • Several factors come into play in determining potential upside from day trading, including starting capital amount, strategies used, the markets you are active in, and luck.
  • Experienced day traders tend to take their job seriously, remaining disciplined, and sticking with their strategy.

What Day Traders Do

Day traders typically try to make money by buying stock, options, futures, commodities, or currencies, while holding positions for short periods of time— anywhere from a few minutes to a few hours—before selling them again. Day traders enter and exit trading positions within the day (hence, the term day traders) and rarely hold positions overnight. The goal is to profit from short-term price fluctuations. Day traders can also use leverage to amplify returns, which can also amplify losses.

Setting stop-loss orders and profit-taking points for trades—and not taking on too much risk per trade—is vital to surviving as a day trader. Professional traders often recommend not risking more than 1% of your portfolio on a single trade. If a portfolio is $50,000, for example, the most risk per trade is $500. The key to managing risk is to not let one or two bad trades wipe you out. If you stick to the 1% risk strategy and set your stop-loss orders and profit-taking points, you can limit your losses to 1%, and take your gains at 1.5%, but it takes discipline.

How to Get Started in Day Trading

Getting started in day trading is not like dabbling in investing. Any would-be investor with a few hundred dollars can buy shares of a company and keep it for months or years. However, under FINRA rules, pattern day traders in the equities market must maintain a minimum of $25,000 in their accounts and will be denied access to the markets if the balance drops below that level. This means day traders must have enough capital on top of that to really make a profit. And because day trading requires a lot of focus, it is not compatible with keeping a day job.

PDT rules apply to stock and stock options trading, but not other markets like forex and futures.

Most day traders must be prepared to risk their own capital to make profits. In addition to the minimum balance required, prospective day traders need to be connected to an online broker or trading platform and have the right software to track their positions, do research, and log their trades. Brokerage commissions and taxes on short-term capital gains can also add up. Aspiring day traders need to factor all costs into their trading activities to determine if profitability is attainable.

Earning Potential and Career Longevity

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 have the benefit of not risking their own money and are also typically far better capitalized, with access to advantageous information and tools. Meanwhile, some independent trading firms allow day traders to access their platforms and software but require that traders risk their own capital.

Other important factors that contribute to a day trader's earnings potential include:

  • Markets you trade: Different markets have different advantages. Stocks are generally the most capital-intensive asset class. Individuals can start trading with less capital with other asset classes, such as futures or forex.
  • How much capital you have: If you start with $3,000, your earning potential is much less than someone who starts at $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.

Example of a Day Trading Strategy in Action

Consider a strategy for day trading stocks in which the maximum risk is $0.04 and the target is $0.06, yielding a reward-to-risk ratio of 1-to-1.5. A trader with a $30,000 account balance decides that their maximum risk per trade is $300. Therefore, 7,500 ($300/$0.04) shares on each trade will keep the risk within the $300 risk cap (not including commissions).

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

  • 60 trades are profitable: 60 x $0.06 x 7,500 shares = $27,000.
  • 45 trades are losers: 45 x $0.04 x 7500 shares = ($13,500).
  • The gross profit is $27,000 - $13,500 = $13,500.
  • The net profit, which includes the cost of commissions, is $13,500 - commissions ($30 x 100 = $3,000) = $10,500 for the month.

4:1

The minimum equity requirement for a pattern day trader is typically $25,000 or 25% of the total market value of the stock, whichever is greater. Therefore, an account with $30,000 has $120,000 of buying power, or a ratio of 4:1.

Of course, the example is theoretical, and several factors can reduce profits from day trading. The reward-to-risk ratio of 1.5 is used because the number is fairly conservative and reflective of the opportunities that occur all day, every day in the stock market. The starting capital of $30,000 is also just an approximate balance to start day trading stocks; you will need more if you wish to trade higher-priced stocks.

The Bottom Line

Day trading is not a hobby or an activity that you can do every once in a while if you are serious about doing it to make money. While there is no guarantee that you will make money day trading or be able to predict your average rate of return over any period of time, there are strategies you can master that will help you set yourself up to lock in gains while minimizing losses.

It takes discipline, capital, patience, training, and risk management to be a day trader and a successful one at that. If you're interested, review the best stock brokers for day traders as the first step is to choose the right broker for your needs.