How Much Do Day Traders Make?

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Cody Huelster

Nov 11th 2022  .  8 min read

How much can you make as a day trader?

Day trading can be a very lucrative career for those who learn to trade profitably. However, there are many things one should consider before choosing this career path. This article will discuss some pros and cons of learning to day trade and what a trader can reasonably expect to earn.

What is day trading?

The term “day trading” is widely used to describe certain trading activities; it’s important to identify exactly what’s included in that definition. A “day trade” describes any trade that is opened and closed within the same trading session. A day trader is defined as a trader who opens and closes four or more day trades within a five-day rolling period. Therefore day traders are traders who make a living entering and exiting trades that are high-frequency in nature. Day traders often make multiple round-trip trades within the same trading session. This is because they are taking advantage of short-term or intraday price movements in specific stocks or options. 

Day traders are known for using specific trading strategies designed to be used within short-term time frames, such as hourly, 30-minute or 5-minute time frames.

Popular day trading strategies 

Momentum Trading

Momentum trading is a strategy that involves making trades based on momentum. Momentum is defined as the rate of change in the price of the underlying asset. Momentum traders seek to capitalize on the momentum by buying assets that are increasing in price and selling assets that are decreasing in price. Momentum trading can be applied to any asset class, including stocks, bonds, options, commodities, and currencies. 

The key to momentum trading success is identifying the right time to enter and exit a trade. Momentum traders use a variety of technical indicators to help them make trading decisions. Some common momentum indicators include the moving average convergence divergence (MACD) indicator, the relative strength index (RSI) indicator, and the stochastic oscillator. Momentum trading is a high-risk/high-reward strategy, and it is essential to remember that not all momentum trades will be successful. It is crucial to have a sound risk management strategy in place to protect your capital.

Swing Trading

Swing trading is a strategy that attempts to capture gains in a stock within one or two days. Unlike day trading, which seeks to capitalize on small intraday price movements, swing trading is designed to take advantage of broader changes in the direction of the stock. Swing traders will typically hold a position for a few days to several weeks and will often use technical analysis tools to time their entries and exits. 

While swing trading does require patience and discipline, it can be an effective way to generate profits in the stock market. Swing trading is particularly well suited for investors with small to medium accounts, as it requires less capital than other strategies such as day trading or position trading. Swing traders should also be aware of the risks inherent in any stock market investment and should only swing trade with funds they can afford to lose. This strategy can be used on smaller time frames that would be used for day trades. One of the most common indicators used for swing trading is the TTM Squeeze. The TTM Squeeze was created by John F. Carter, the founder of Simpler Trading. 

Scalping

Scalping is a trading strategy where traders seek to profit from small price changes in short time frames. Scalpers typically trade with high leverage and close all their positions by the end of the day. Scalpers usually don’t take large positions, aiming to make small but consistent profits. Scalpers must also be very disciplined and stick to their trading plan and not overtrade. Scalping can be a very profitable trading strategy, but it takes a lot of practice and discipline to succeed. Many times traders who are scalping small trades will use ETFs like SPX or futures and only trade specific setups. To learn more about scalping and day trading, check out the Simpler Day Trading room. 

How day traders get funded

Prop trading

Proprietary trading, also known as prop trading, is when a firm uses its capital to trade financial instruments in the markets. Prop traders take on investment risks in hopes of earning a profit for their firm. Proprietary trading differs from other types of trading, such as client-driven trading, because the firm is taking on the risk instead of passing it on to clients. 

Prop traders work for banks, hedge funds, and other financial institutions. They use their firm’s capital to trade stocks, options, bonds, currencies, and other financial instruments to earn a profit for their employer. Prop trading can be a high-pressure job, as traders are constantly pressured to perform well and generate profits for their firm. They may be fired or demoted if they don’t meet expectations. Additionally, prop traders normally trade significant amounts of money, which may add additional stress to the job. 

Self-funded trading

A self-funded day trader is someone who day trades with their own money. Self-funding has its pros and cons. One of the pros of self-funding is that a day trader has complete control over their trading. They don’t have to answer to anyone else and they can make decisions regarding risk management and trading frequency. However, this can be a double-edged sword. Day traders must be disciplined and without the support of peers or a trading community, can find themselves at the mercy of the market. Another con of being self-funded is that traders are risking their own money. If they make bad trades, they could lose everything they’ve put into their account. 

Overall, self-funding has its pros and cons, but it ultimately comes down to whether or not a day trader is willing to risk their own money and how disciplined they can be. 

Starting capital required for day trading

When it comes to starting capital, the amount you need will depend on the Pattern Day Trading Rule. This rule imposes a minimum equity requirement of $25,000 for any US-based trader who wants to execute four or more trades over the course of five business days. So, if you plan on day trading regularly, you will need to have at least $25,000 in starting capital. However, it is important to note that this is just the minimum amount required by the PDT rule

Many experienced day traders recommend starting with a larger amount of capital, as it gives you more flexibility and allows you to weather any losses more easily. Ultimately, the best way to determine how much starting capital you need is to practice with a demo account until you feel comfortable with your strategies and are able to generate profits consistently.

Profit Margins

Like other traders, day traders often aim to earn a certain percentage of their account daily or weekly. Some traders aim to earn 1%-2.5% of their account balance daily. It should be noted that higher risks usually accompany higher returns and that traders who risk more have a higher potential to blow out their trading accounts. Many profitable traders attest to the importance of proper risk management. Self-funded traders set their risk management rules. 

Prop traders are often bound to the rules of the trading firm they work for. This may include position sizing, risk per trade, what instruments they can trade, and the number of trades per month. Prop traders may be paid an annual salary and a percentage of their trading account’s growth as a bonus. Average salaries for prop traders range from $47,600-$151,364

Pros & cons of day trading

Day trading is a popular way to make a living, but it’s not for everyone. Before you decide to day trade, it’s essential to understand the pros and cons. One of the biggest pros of day trading is that you have the potential to make a lot of money. If you’re good at it, you can make more in one day than most people make in a month.

However, day trading is also very risky. You can also lose a significant amount of money if you don’t use appropriate risk management. If you’re going to day trade for a living, you need to be able to handle the risk. Another con of day trading is that it’s very time-consuming. Not all trading strategies require traders to sit in front of their computers all day; however, day trading can be very time intensive. Day traders are often present for market hours, depending on market conditions and their strategies. 

Learn to day trade

If you have decided to embark on the journey of becoming a day trader, consider joining the Simpler Day Trading Room. This small investment can yield big dividends as you learn from professional traders who trade real money.