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

To be sure, losing money at day trading is easy. A research paper from University of California researchers Brad Barber and Terrance Odean found that many individual investors hold undiversified portfolios and trade actively, speculatively and to their own detriment. Day traders can also incur high brokerage fees, so picking 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.
  • 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 target stocks, options, futures, commodities or currencies, holding positions for hours or minutes before selling again. Day traders enter and exit positions within the day, hence the term day traders. They rarely hold positions overnight. The goal is to profit from short-term price movements. Day traders can also use leverage to amplify returns, which can also amplify losses.

Setting stop-loss orders and profit-taking points—and not taking on 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, the most at risk per trade is $500. The key to managing risk is to not allow one or two bad trades to wipe you out. If you stick to a 1% risk strategy and set strict 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, the Financial Industry Regulator Authority (FINRA) sets rules for those they define as pattern day traders. These rules require margin traders who trade frequently to maintain at least $25,000 in their accounts, and they cannot trade if their balance drops below that level. This means day traders must have sufficient capital on top of the $25,000 to really make a profit. And because day trading requires focus, it is not compatible with keeping a day job.

Pattern day trading rules apply to stock and stock options trading, but not other markets such as forex.

Most day traders should be prepared to risk their own 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 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 don't risk their own money and are typically 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 traders to risk their own capital.

Other important factors that impact 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 than with other asset classes, such as futures or forex.
  • 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.

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 $30,000 decides their maximum risk per trade is $300. Therefore, 7,500 shares on each trade ($300 / $0.04) 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 x $0.06 x 7,500 shares = $27,000.
  • 45 trades are losers: 45 x $0.04 x 7,500 shares = ($13,500).
  • The gross profit is $27,000 - $13,500 = $13,500.
  • If commissions are $30 per trade, the profit is $10,500, or $13,500 - ($30 x 100 trades).

4x

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

Of course, the example is theoretical. Several factors can reduce profits. A 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 occasional activity if you are serious about trading to make money. While there is no guarantee you will make money or be able to predict your average rate of return over any period of time, there are strategies you can master to help you lock in gains while minimizing losses.

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