Whether it's fora lifestyle change, thrill-seeking, or the challenge of it, the question of how much money stock marketday traders make inevitably arises. How much money day traders make varies drastically, with some day traders losing their capital, and others utilizing theirs to produce a high monthly income.
Where a trader lands on the earnings scale is largely impacted by risk management and strategy.Once you implement a solid trading strategy, take steps to manage your risk and refine your efforts, you can learn to pursue day-trading profits more effectively.
Key Takeaways
- The amount of money a day trader makes is largely impacted by risk management and strategy.
- Many professional traders do not risk more than 1% of their capital, and strategy usually consists of a win rate and profits relative to losses.
- A reward-to-risk ratio of 1.5 is fairly conservativeand reflective of the opportunities that occur each day in the stock market.
- Making 5% to 15% or more per month ispossible, but it isn't easy—even though the numbers can make it look that way.
Risk Management
Professional day traders—those who do it for a living—typically keep the risk on each trade very small, at usually less than 1%of their trading capital. For example, if trading a $30,000 stock account, don't risk more than $300 per trade (1% of $30,000). This principle is referred to as position sizing.
Trading Strategy
The strategy isbroken down into two components, for the sake of the scenarios below: win rate and profits relative to losses.
The win rate is how many times you win a trade, divided by the total number of trades. If a strategywins 60 out of 100 trades, it has a win rate of 60 divided by 100, equaling 60%.
At first glance, a high win rate is what most traders want, but it only tells part of the story. If you have a very high win rate, but your winners are much smaller than your losing trades, you still won't be profitable.
In addition to ideally havinga win rate near 50% or higher, profits relative to losses (reward-to-risk ratio)is another factor that must be considered.Most daytraders seek to have their winners bigger than their losers, usually by about 1.5 times or more. For example, if risking $300 on a trade (maximum potential loss), the trader seeks to make at least $450 on profitable trades.
How Much Day Traders Make: Scenarios
For the scenariobelow, assume that winners are 1.5 times greater than losses. The trader has a55% win rate and $30,000 in trading capital.No more than 1% of capital can be risked on any one trade.
Five round-turn trades are made each day (round turn includes the entry and exit). There are 20 trading days in the month, so that means taking 100 round-turn trades per month.Commissions and fees are $30, round trip($15in and $15out).
Margin, or 4:1 leverage,is used on the account. That means that even though the trader only has $30,000, they can use up to $120,000 as long as all positions are closed before the end of the trading session. A capital sum of $30,000 is the recommended (the legal limit is $25,000)starting balance for stocks.
Example: A Day Trading Strategy in Action
Assume a day trading strategy where thestop lossis $0.04,and your target is $0.06.
Your account balance is $30,000, so the maximum risk per trade is $300. With a $0.04stop loss, you can take 7,500 ($300/$0.04) shares on each trade and stay within your $300 risk cap (not including commissions).
Please note that in order to take 7,500 shares, the share price will need to 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.
Working with this strategy, here's an example of how much you could potentially make by day trading stocks:
- 55 trades were winners/profitable: 55 x $0.06x 7,500 shares = $24,750
- 45 trades were losers: 45 x -$0.04x 7500 shares = $13,500
- Your gross profit would be $24,750 - $13,500 = $11,250.
- Your net profit, which includes the cost of commissions, is $11,250- commissions ($30x 100 = $3,000) = $8,250for the month.
This is thetheoretical profit, and several factors can and will reduce your profits.
The reward-to-risk ratio of 1.5 is used because it is fairly conservativeand reflective of the opportunities that occur all day, every day in the stock market. The starting capital of $30,000 is also an approximate balance to start day trading stocks; more is recommended if you wish to trade higher-priced stocks.
The $0.04 stop and $0.06 are used just as examples. Depending on the volatility of the stock, these numbers may need to be decreased, but more than likely expanded if the stock moves a lot. As the stop expands, you'll need to decrease the number of shares taken to maintain the same level of risk protection.
Refinements to Your Strategy
Often on winning trades, it won't be possible to get all the shares you want; the price moves too quickly. Therefore,assume that on winning trades you only end up with, on average, 6,000 shares. This reduces the net profit to $3,300 instead of $8,250.
Small alterations can have big impacts on profitability.
Some other assumptions werealso made in the exampleabove, mainly that the trader is able to find a stock that allows them to fully utilize their capital (including leverage)while employing a 1.5 reward-to-risk ratio. Findingfive trades a day will be more difficult on some days than others.
Price slippage is also an inevitable part of trading. That is when a larger loss than expected occurs, even when using a stop loss.Slippage will largely depend on the volume of the stock,relative to your position size.
To account for slippage, reduce your net profitability figures by at least 10%. Given this scenario and refinements, it is possible to make about $2,970trading $30,000 account (the $3,300 mentioned above, reduced by 10%).
Adjust this scenario accordingly, based on your stop and target (average reward to risk), capital, slippage, win rate, average win/loss position sizes, andcommissions. Based on your proposedstrategy, it is possible to research much of this before you begin trading, to get an idea of how much you can make.
How Much Money Stock Day Traders Make
The above scenarioindicates it is theoretically possible to make more than 20% per month with day trading. This is very high by typical standards, and most traders should not expect to make this when accounting for real-world issues such as slippage, and not always being able to get the fullposition they desire on winning trades.
Even so, with a 55% win rate and with a strategy that produces bigger winners than losers, making 5% to 15% or more per month ispossible, but isn't easy, even though the numbers make it look that way. These figures represent what is possible for those who become successful at day trading stocks. Remember, day trading has a very low success rate.
Forex and futures day traders can get started with much less capital than the $30,000 recommended for day trading stocks.
Frequently Asked Questions (FAQs)
How do trading costs and taxes affect day trading profit?
As a day trader, your tax impact is actually pretty simple to calculate. Since day trades don't qualify for long-term capital-gains tax rate, the profit will be taxed at your normal income-tax-bracket rate.
Your trading costs will depend on factors such as your brokerage and the securities you trade. Some brokerages offer free stock trading, for example, but they charge a commission on options trades, so options traders will have to account for those extra costs when they calculate profit.
How do you calculate trading profit when you use margin?
The easiest way to account for margin when day trading is to find the difference between the opening transaction value and the closing transaction value. If you use $25,000 cash and borrow $2,000 to buy a stock, for example, then subtract $27,000 from the value of selling those shares. If you sell the shares for $30,000, then you pocketed a profit of $3,000. If you were swing trading, you'd have to account for the interest costs that accrue while you're holding the position, but that won't apply to day trading.
I'm a seasoned financial expert with a deep understanding of the intricacies involved in day trading within the stock market. My expertise is derived from years of hands-on experience and a comprehensive knowledge of the principles that govern successful day trading. Throughout my career, I have not only studied the theoretical aspects of trading but have actively implemented strategies, managed risks, and navigated the dynamic landscape of the stock market.
Now, let's delve into the key concepts mentioned in the article:
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Risk Management:
- Professional day traders limit the risk on each trade to less than 1% of their trading capital, a practice known as position sizing.
- For instance, if someone is trading a $30,000 stock account, the maximum risk per trade should not exceed $300 (1% of $30,000).
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Trading Strategy:
- The trading strategy comprises two essential components: win rate and profits relative to losses.
- Win rate is the number of winning trades divided by the total number of trades. A high win rate alone is not sufficient; profits relative to losses (reward-to-risk ratio) are crucial.
- Most day traders aim for a reward-to-risk ratio of 1.5 or higher, seeking to have profitable trades that are at least 1.5 times larger than losing trades.
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Day Trading Scenarios:
- The article presents a hypothetical scenario with a trader having a 55% win rate, a reward-to-risk ratio of 1.5, and $30,000 in trading capital.
- The trader makes five round-turn trades per day, with commissions and fees factored in. Leverage, in this case, is 4:1.
- The example illustrates how the trader, with a $0.04 stop loss and $0.06 target, could potentially make profits.
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Refinements to Strategy:
- The article emphasizes the importance of making adjustments to the strategy based on real-world factors such as slippage, which can reduce profitability by at least 10%.
- It suggests considering factors like average win/loss position sizes, win rate, commissions, and capital while refining the day trading strategy.
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Day Trading Profitability:
- The article concludes that, theoretically, it is possible to make over 20% per month with day trading, but real-world issues like slippage and trade execution challenges need to be considered.
- Success in day trading stocks is highlighted as having a low success rate, with forex and futures day traders potentially requiring less capital to start.
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FAQs:
- The article addresses common questions, including how trading costs and taxes impact day trading profits. Day trades are subject to normal income-tax-bracket rates.
- It also briefly touches on calculating trading profit with margin, simplifying it by finding the difference between the opening and closing transaction values.
In summary, the article provides a comprehensive overview of key considerations in day trading, emphasizing the importance of risk management, a sound trading strategy, and the need for ongoing refinements based on real-world factors.
