It's the question at the tip of every aspiring day trader’s tongue: how much money can I earn from day trading? 

Since most day traders do not disclose their trading results to anyone but the IRS, an exact answer to how much money an average day trader makes is impossible to answer. The results vary widely given the trading strategies, risk management practices and the amount of capital individual traders are working with. To be sure, it is very easy to lose money day trading, which is why we recommend educating yourself as much as possible before you even think about trying it. A 2011 research paper, "The Behavior of Individual Investors", from Professors Barner and Odean from the Univ. of California 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 are very important.

((If you are interested in learning how to get started, check out our Become a Day Trader course on the Investopedia Academy. Our instructor, David Green, has been a trader for more than 30 years and has valuable insights to share.))

Day traders make money by buying stock, commodities, currencies or other trade-able securities and holding them for a short period of time--anywhere from a few minutes to a few hours--before selling it off again. Day traders usually enter and exit trading positions within the day and rarely hold positions overnight, except in the Forex Market. The focus is on profiting from short-term price fluctuations. Day traders can also use leverage to give themselves greater power to buy and sell. This can be extremely risky, so beginners should not attempt this strategy.

One of the key components of locking in your gains and minimizing your losses is setting Stop/Loss and Profit Taking points for your trades and not taking on too mush risk per trade. Professional traders like David Green recommend not risking more than one percent per trade based on the size of your portfolio. If your portfolio is $50,000, the most you should risk per trade should be $500. Not letting one bad trade wipe you out is key to managing your risk. If you stick to the 1% risk strategy, and set your Stop Loss and Profit taking points, you can limit your losses to 1%, and take your gains at 1.5%, but it takes discipline.

Getting started in day trading is not like dabbling in investing. Anybody would-be investor with a few hundred dollars can buy some stock in a company they believe in and keep it for months or years. 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 realistically make a profit. And because day trading requires a lot of focus, it is not compatible with keeping a day job. Most day traders need to be able to live off their profits from trading and be prepared to risk their own capital every day to make those 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, so day traders need to factor all their costs into their trading activities to determine if they can do it profitably. (For an in-depth review of the subject seeAn Introduction To 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 have the benefit of not risking their own money. They are also typically far better capitalized and have access to advantageous information and tools. There are also many independent trading firms that allows day traders access to their platforms and software, but require the traders to risk their own capital as well. Of course, there are millions of independent day traders all over the world who work for themselves from their homes or home offices and are able to earn a living. Some have even become very wealthy, but there no guarantees, of course. Practice, developing a strategy and managing your risk can help get you on your way.

The Bottom Line

Day trading is not a hobby or an activity you can do every once in a while if you are serious about doing it to make money. While there is no guarantee 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.

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