How Much Do Day Traders Make? Your Income Depends on This!

Many people are always interested in day trading because of the vast amount of money that one can make. As such, one of the most common questions is on how much day traders make. The question is legitimate and even a basic one. However, as we shall see, the answer will not be so simple.

In this article, we will explain how day trading works, how traders make money, and provide an honest estimate of how much money they make.

How day trading works

Day trading is the simple process of buying and selling financial assets with the goal of generating a profit. Examples of these financial assets are stocks, commodities, forex, exchange-traded funds (ETFs), bonds, and cryptocurrencies.

Traders do an analysis on these assets and then make a prediction about whether the price will go up and down. If they expect that the price will rise, they will execute a buy trade. Similarly, if they believe that the price will fall, they will execute a short or sell trade and then make money as this happens.

As you can imagine, making this prediction is not always easy, especially among inexperienced traders. This explains why only a small number of people make constant returns in trading. It is estimated that only 15% of people who start trading will become successful in the long term.

Day trading strategies

To become successful traders, they use several strategies. There are those who focus on being scalpers, where they open and close trades within seconds. These ones can open hundreds of trades every day.

Further, there are swing traders who focus on opening a few trades and then holding them for just a few days. There are also position traders who prefer holding positions for a long time.

Additionally, traders use several strategies to make money. These ones include copy trading, trend-following, and algorithmic trading

How day traders make money

Day traders make money only when their predictions work out well. For example, if you buy a stock at $10 and exit at $12, you will have made a return of 20%. In highly volatile markets, it is possible to even double your money if the price moves from $10 to $20.

At times, traders can make more money than usual because of something known as leverage. Leverage is a situation where your broker gives you more money to trade with. For example, if you have $1,000 and select a leverage of 100:1, it means that your buying power is $100,000.

While leverage is a good thing, it can also lead to substantial losses that are bigger than your entire account. This happens since leverage is like a loan. As such, if the price declines dramatically, you will lose your money and then be forced to pay the margin loan. Many brokers have negative-balance protection.

Expenses when day trading

There are a number of expenses to keep in mind when it comes to trading. Unlike in the past, however, the cost of trading has declined dramatically in the past few years. First, you need trading hardware, which can be a normal smartphone or laptop.

Second, there are broker fees, depending on the company you use. These days, you can avoid this fee by using popular brokers like Schwab, Robinhood, and TD Ameritrade.

Third, if you are running a trading office, you need to pay rent and administrative fees. In most cases, you can avoid these fees by just trading at home.

Finally, there are expenses relating to taxes. In most countries, you need to pay taxes on all your profits. Since this amount of tax differs, it is always important to consult a tax advisor on this.

Example of returns in trading

One way of estimating how much money traders make is to look at returns of hedge funds. In most cases, traditional hedge funds like Pershing Square Capital make less than 30% every year. These funds buy and hold assets for a long time.

On the other hand, quantitative hedge funds like DE Shaw and Renaissance Technologies make more than 40% returns every year.

At DTTW, we have thousands of traders. As shown below, our most profitable partners make a few hundred thousand dollars a week. However, these are offices made up of numerous traders, and they are not always the same.

You can check the average and median profits of a DTTW™ office on our dedicated page.

What affects traders' revenue

There are several factors that affect the amount of money that a trader can make in the market. Some depend directly on the trader, the type of approach and his skills. Others are more related to the market aspects and conditions that each asset can offer.

Account size

First, the amount of money you have will determine how much you can make. For example, you will make less money if you have a $100 account than a person who has a $1,000 account. In this case, the trader with $100 will make a $100 profit if the price rises by 100%.

Markets

Second, the revenue is affected by the markets you trade. For example, if you are trading stocks, some sectors like technology are more profitable than others like utilities. Similarly, some highly liquid companies like Netflix are more profitable than others like Berkshire Hathaway.

Market conditions

Third, the state of the market will play an important role in determining your profitability. Ideally, a trader will make less money when their assets are in a tight range.

For example, if a stock is ranging between $10 and $10.5, it is hard to make money. On the other hand, a trader will make more money when the market is either volatile or is trending.

Related » How to Make Profitable Trades in Every Market Conditions

Your experience and expertise

Fourth, experience and expertise are so important in determining the amount of money that one can make. A highly experienced trader will make more money than one who is just starting.

Additionally, as mentioned, leverage is another important part that affects the traders’ profitability. A trader with a high leverage will make more money than one who trades without this leverage.

Risk/reward ratio

Finally, your risk appetite has a role in determining the amount of profitability that one has. Risk-averse people tend to make less amount of money than those who are open to more risk.

For example, a trader who buys 100 shares of a company will make more money than one who buys 50 shares. Similarly, if the trade fails to work, the opposite will happen.

FAQs

Is day trading highly profitable?

Day trading can be a highly profitable when done right. However, like all other businesses, it is a highly risky thing to do.

What are the financial risks of day trading?

There are many risks that come with day trading. The most serious one is when you lose more money than what you invested. Other risks are of making substantial losses for an extended period of time.

How do taxes affect my performance?

In most countries, traders are required to pay taxes on their profits every year. These taxes require them to deduct their losses from their profits.

External useful resources

  • Average Income of a Day Trader - Chron

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