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 2021, the average day trader's annual income was around $74,000.

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. 

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.

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, the most at risk per trade are $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%. 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 $0.04 and the target is $0.06, 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/$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 × $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 $10,500, 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 are 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 capital.

Other important factors that can impact 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 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.

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

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 profits. 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 offerinstead of 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 was a great degree of variance in the average day trader's salary, with some day traders making six figures and others losing money.

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 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 cannot trade if their balance drops below that level.

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 profitability is feasible.

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

How Many Trades Can a Day Trader Make in a Day?

Depending on the strategy employed, many day traders make tens to hundreds of trades per day, on average. With algorithmic and high-frequency trading (HFT) systems available, other day traders can make tens of thousands of individual trades in a single day (with the help of computers). To be labeled a pattern trader by your broker, however, regulators state that you need only make four-day trades over five business days.

What Is the Success Rate Among Day Traders?

The success rate for making money from day trading is actually quite low. Depending on the source, only around 5% to 20% of day traders consistently make money. That means that up to 95% fail and lose money by day trading.

What Are the Financial Risks of Day Trading?

The most obvious risk is losing money—sometimes all of it. Few day traders consistently earn a profit over time. Therefore, consider spending your time and money on other, more productive activities.

The Bottom Line

Day trading is not a hobby or an occasional activity if you are serious about making money. While there is no guarantee that you will make money or be able to predict your average rate of return over any period, there are strategies that 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 stockbrokers for day trading to choose the right broker for your needs.

Article Sources
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  1. Glassdoor. “Day Trader Salaries.”

  2. Terrance Odean and Brad M. Barber. “Handbook of the Economics of Finance: Chapter 22 — The Behavior of Individual Investors,” Page 1534.

  3. Financial Industry Regulatory Authority. “Day-Trading Margin Requirements: Know the Rules.”

  4. Business Insider. “If You’re Day Trading, You Will Probably Lose Money: Here’s Why.”

  5. Dummies. “Day Trading Success Rates.”

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