Trading with gains. How do successful traders do it

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How Much Can You Make as a Day Trader

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

Since most day traders do not disclose their actual 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, moreover, will vary widely given the various 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. In their 2020 research paper “The Behavior of Individual Investors,” Professors Brad M. Barner and Terrance Odean at the University 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 is very important.

Key Takeaways

  • Day trading is a risky but potentially lucrative activity, where traders try to take advantage of intraday price movements and trends.
  • Several factors will come into play in determining your potential upside from day trading, including starting capital amount, strategies used, the markets you are active in, and a bit of luck.
  • Real day traders take their job seriously and can maintain a nice living if they remain objective and disciplined and stick with their strategy.

What Day Traders Do

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 them 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 much risk per trade. Professional traders like David Green recommend not risking more than 1% 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.

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 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 really make a profit. And because day trading requires a lot of focus, it is not compatible with keeping a day job.

Most day traders must 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.

Earning Potential and Career Longevity

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 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 allow day traders access to their platforms and software, but require the traders to risk their own capital as well.

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. However, you 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.
  • How much you put into training: To achieve consistent income—where you have a solid trading plan and are able to implement it—it will likely take a year or more if you dedicate yourself to it full time. If you only practice part-time, it may take a number of years to develop real consistency and attain satisfactory returns.

Of course, there are millions of independent day traders worldwide who work for themselves from their home offices and are able to earn a living. Some have even become very wealthy, but there are no guarantees. Practice, developing a strategy, and managing your risk can help get you on your way.

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Example of a Day Trading Strategy in Action

Consider a strategy for day trading in which the stop/loss is $0.04 and the target is $0.06. If your account balance is $30,000, the trader decides that his maximum risk per trade is $300. With a $0.04 stop loss, you can take 7,500 ($300/$0.04) shares on each trade and stay within your $300 risk cap (not including commissions).

Remember, to take 7,500 shares, the share price must be below $16 (attained by $120,000 in buying power divided by 7,500 shares). If the per-share price is more than $16, you’ll need to take fewer shares. The stock also needs to have enough volume for you to take such a position.

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

  • 60 trades were winners/profitable: 60 x $0.06 x 7,500 shares = $27,000.
  • 45 trades were losers: 45 x $0.04 x 7500 shares = ($13,500).
  • Your gross profit would be $27,000 – $13,500 = $13,500.
  • Your net profit, which includes the cost of commissions, is $13,500 – commissions ($30 x 100 = $3,000) = $10,500 for the month.

Of course, this is all theoretical. Several factors will reduce your take-home profit. The reward-to-risk ratio of 1.5 is used because it 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’ll 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 in becoming a day trader, review the best stock brokers for day traders as the first step is to choose the right broker for your needs.

9 Things Successful Traders (& People) Do

Verified Profitable Trader

Successful traders and people often do things differently than the rest of the crowd. But what they do is not magical or something unavailable to you. A successful trader mindset is always behind these people, and this is something you can build. There is very little about trading that is easy, and often times I hear of traders applying the wrong mindset to the challenges they face. Here are 9 simple things successful traders (& people) do, which you can adopt to change your compass towards success.

1. Have a Passion For the Process

Around the age of 5, Earl Woods brought his son on to a TV show to demonstrate how good his son’s golf swing was. After the young Tiger showed a glimpse of what he was to become, his dad was asked the following question;

“How many hours do you make him practice every day?”

Earl quickly responded, “Make him…I cannot get him to stop.”

You have to have a passion for trading and the process. Your passion cannot be ‘ outcome dependent ‘, meaning if you make x dollars in y months, then I’ll remain motivated to do the work. You must be willing to do the work, particularly in the moments when things are not working your way. It is easy to do the work when all is going well.

2. You Must Accept a Tedium of Work in Your Learning Process

There will be moments in your learning process which will seem boring, tedious, and difficult. You will often have to work on things you like the least – perhaps money management, filling out your trading journal or reviewing your trades. It is unlikely you will enjoy everything you do equally. In all great things built, there was always a tedium of work in the process – the moments where you sweat, tire and become exhausted. You must accept this tedium of work, and understand those little things build up skills and wire your brain to trade successfully.

3. Frustration Often Times is a Sign of Progress

When the brain gets to something it doesn’t understand, it often gets frustrated not having the answer. Being frustrated by something in your trading process is a communique you are dealing with things more complex than you understand, or can do efficiently now. This is a good thing. It means you are now heading into territory you are not skilled in, but need to be to become a successful trader. Be grateful those things are being pointed out – for when you work on them, growth happens.

4. You and Your Environment Imprint Upon You

The things you say to yourself before, during and after each trade have an impact. They imprint upon you, particularly the emotional quality of them. The same goes for your environment (parents, friends, co-workers). Make sure what is imprinted upon you is positive and directs you towards being successful. Learn to protect your mental capital.

5. Do Not Expect Immediate Results

Nobody who is a successful trader (or successful at anything) got there in a matter of months and expected immediate results. In a great commercial ‘Maybe It’s My Fault‘, amongst saying many brilliant things, Michael Jordan shares the following;

“Maybe I led you to believe that basketball was a god given gift, and not something I worked forevery single day of my life . “

It’s easy for us to see the success of such people. But we often fail to see all the hard work behind it. Michael had to work at his game for years, often filled with failures before he started to notice results. Real change in your trading does not come easily or quickly.

6. Do Not Look For an Easy Way Out

I have never met a successful trader or person who looked for the easy way out. You can pirate all the systems you want, but you will not have the mindset of abundance to be successful. You can try all the robots out there – none will become the ATM machine you think they will.

Do you really think Tom Brady or Peyton Manning got to being elite quarterbacks by not doing the work? Do you really think they skipped steps?

Remember, 84% of all people who win the lottery are broke inside three years. Now ask yourself who you’d rather be;

Person A – who makes $1 million in a lottery

Person B – who built up a business over three years and made $1 million?

Who will be able to repeat that success, use their skills, experience, and be most likely to do it again? Obviously Person B, while Person A by contrast has no skills, information or experience working for them. Food 4 thought, but do not look for an easy way out. There is none.

7. In The Future, I will…

I cannot tell you how many students tell me, or my partner Aruna who does the ERT training program, that they will feel confident, relaxed, or happy when they become a successful trader. Why put your happiness on hold? Why make your mindset held captive to some unknown future? Why not feel confident, relaxed and happy now?

A good friend of mine recently shared this great quote and post which said the following;

Ego says “Once everything falls into place, I will find peace.” Spirit says, “Find Peace and everything will fall into place.”

8. Take Responsibility for Your Behavior

Would you expect to be capable of finishing a marathon without running, stretching, training, proper hydration and diet? Would you expect to build strength and muscles sitting in a chair all day? Of course not. What makes you think trading is different?

Don’t fill out your journal, evaluate your trades, train properly, build your trading skill set, or a successful trading mindset – then do not expect to become a successful trader. Be honest with yourself and take responsibility for your behavior.

9. Failure is a Part of All Successful Ventures

Failure is a part of the process – an element you have to befriend. If you make it mean something about you, then it will consume you and create negative trading habits. However if you learn from failures, you will grow from them. You have overcome challenges like this in the past. When those challenges were happening, at one point you didn’t think you could get around them. This situation is no different.

Remind yourself of the challenges you have overcome to get here, and what strengths you have. They will aid you in difficult times. Peter Vesterbacka – the creator of Angry Birds, had produced 51 games prior to creating Angry Birds, and virtually ended up in Bankruptcy. It has done over $6B in sales over the last few years. Failure is a part of all successful ventures. Real confidence comes in overcoming obstacles, failures and challenges.

Taxing Your Income from Day Trading

Income seems like a straightforward concept, but little about taxation is straightforward. To the IRS, the money you make as a day trader falls into different categories, with different tax rates, different allowed deductions, and different forms to fill out.

Earned income

Earned income includes wages, salaries, bonuses, and tips. It’s money that you make on the job. But even if day trading is your only occupation, your earnings are not considered to be earned income. This means that day traders, whether classified for tax purposes as investors or traders, don’t have to pay the self-employment tax on their trading income. Isn’t that great?

Maybe. Maybe not. The self-employment tax, the bane of many an independent businessperson, is a contribution to the Social Security fund. The problem is that if you don’t have earned income, you aren’t paying into Social Security, which means that you might not be eligible for retirement benefits. To collect benefits, you have to have paid in 40 credits, and you can earn a maximum of four credits per year. Most employees do this easily, but if you have taken time off work or have a long history of work as an independent investor, you may not have paid enough in.

Any benefits you do collect are based on the 35 years of highest earned income over your work history. Your years of independent trading show up as years with zero earned income, and that might hurt your ultimate benefit.

Investment income

Investment income is your total income from property held for investment before any deductions. This includes interest, dividends, annuities, and royalties. It does not include net capital gains, unless you choose to include them. Do you want to include them? Well, read the next section.

Other than net capital gains, which you might or might not decided to include, most day traders have very little investment income for tax purposes.

Capital gains and losses

A capital gain is the profit you make when you buy low and sell high. The opposite of a capital gain is a capital loss — selling an asset for less than you paid for it. Investors can offset some of their capital gains with some of their capital losses to reduce their tax burden.

Those who trade frequently will have many capital gains and losses, though, and they may very well run afoul of complicated IRS rules about capital gains taxation. When designing your trading strategy, think long and hard about how much pain taxes might cause.

The financial world is filled with horror stories of people who thought they found a clever angle on making big profits, only to discover that their tax liability was greater than their profit. In the real world, taxes matter.

Capital gains come in two flavors: short term and long term. You’re charged a low rate on long-term capital gains, which right now is defined as the gain on assets held for more than one year. How low? It’s 15 percent right now. Short-term capital gains, which are those made on any asset held for one year or less, are taxed at the ordinary income rate, probably 28 percent or more.

Top 4 mistakes that cause futures traders to fail

Many futures traders start trading, make some decent profits, and then, all of the sudden, encounter what seems to be an endless string of losses. These losses eat away at their trading capital as they struggle to figure out what they are doing wrong. To be successful trading in the futures market, you must know what the common pitfalls are and how to avoid them.

Common Futures Trading Mistakes

You can improve your odds of success by avoiding common mistakes many beginner futures traders make. These include:

1. Not Sticking With Your System

All successful futures traders have a system in place to help them select trades and keep losses to a minimum. However, just when a trading strategy is starting to show promise, many traders will deviate or abandon the system they are using. Doing so allows emotion to creep into their trading, which ultimately leads to losses. (Learn more about systems in our pros and cons guide to Trading Systems.)

2. Not Protecting Yourself

Futures trading (like all trading) involves a certain degree of risk, so it is important to protect yourself. There are a few ways to do this, such as using sell or buy stops to limit your losses to a comfortable level, or by using hedging strategies like buying puts. Taking steps to protect yourself will help keep losses to a minimum while maximizing profits. (To learn more, read “The Stop-Loss Order – Make Sure You Use It.”)

3. Not Staying Focused

Trading futures successfully requires your undivided attention to read and evaluate the markets effectively. Sometimes distractions are unavoidable, but you always want to have as few as possible when you are trading.

4. Not Being Open to New Ideas

The markets are always changing. No matter how great you think you are as a trader, there’s always a new idea that can help you improve your results. Too often, traders get caught up in thinking they already know enough and aren’t willing to learn anything new. As market conditions change, this type of trader is left behind with nothing to show but losses. However, if you remain open to new ideas, you will be able to change with the markets – and profit consistently, no matter what they do.

Qualities of Good Futures Traders

A good futures trader is someone who can profit in any type of market condition. Traders come from many different backgrounds and lifestyles, but most good futures traders are:

1. Independent Thinkers

Great futures traders think for themselves rather than follow the crowd. They pay attention to what is happening in the markets and the world to help inform their trading decisions. When the market is falling, they avoid panicking and turn to bearish strategies to make money. They also avoid getting too greedy in rising markets when many investors behave as if the market will go up forever.

2. Strong Analysts

To be a good futures trader, you must understand technical and fundamental analysis and be able to apply them to spot trading opportunities. If you are a beginner, gaining the necessary knowledge and experience may seem like an enormous task. But a wealth of information can be found in books, magazines and on futures-related websites. As you are learning, you can practice and hone your skills by paper trading. (For more, see “Blending Technical and Fundamental Analysis.”)

3. Active Learners

Successful futures traders never stop learning. Consider going to seminars or other events where you can interact with traders and continue your education.

4. Handy With the Tools of Their Trade

Information is key when trading futures. Make sure you have the ability to place trades 24 hours a day, have access to real-time quotes and software to help you analyze the markets, and be able to receive fast executions. With these tools, you can react quickly to changing market conditions.

The Bottom Line

Being a good futures trader means staying informed, sticking with your system, honing your skills and learning from mistakes – your own and those of others. By following these simple tenets, you can increase your odds of seeing more profits and fewer losses in the challenging-yet-rewarding futures market.

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