Is Day Trading Profitable? How to Get Started

A day trader's income varies and depends on the myriad trading strategies, risk management practices, and amount of capital available. In March 2023, the average day trader's annual salary ranged between $34,000 and $96,500.

Whether choosing stocks, options, futures, commodities, or currencies, day traders enter and exit positions within the same day. Losing money is common for day traders as many individual investors hold undiversified portfolios and trade actively, speculatively, and often to their detriment. 

Day traders commonly incur high brokerage fees, so selecting the best broker and creating a manageable trading strategy with proper risk management is essential.

What Day Traders Do

Day traders typically target stocks, options, futures, commodities, or currencies (including crypto). They enter and exit positions within the same day (hence the term day traders). They hold positions for hours, minutes, or even seconds before selling them. They rarely hold positions overnight.

The goal is to profit from short-term price movements. Day traders can also use leverage to amplify returns. Of course, leverage can also amplify losses.

Setting stop-loss orders and profit-taking levels—and avoiding too much risk—is vital to surviving as a day trader. Professional traders often recommend risking no more than 1% of your portfolio on a single trade. If a portfolio is worth $50,000, for example, the most to risk per trade is $500.

The key to managing risk is to prevent one or two bad trades from wiping you out. If you stick to a 1% risk strategy, set strict stop-loss orders, and establish profit-taking levels, you can limit your losses to 1% and take your gains to 1.5% or above. However, this takes discipline.

Example of a Day-Trading Strategy in Action

Consider a strategy for day-trading stocks in which the maximum risk is 4 cents and the target is 6 cents, yielding a risk/reward ratio of 1-to-1.5. A trader with $30,000 decides that their maximum risk per trade is $300. Therefore, 7,500 shares on each trade ($300/4 cents) will keep the risk within the $300 cap (not including commissions).

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

• 60 trades are profitable: 60 × $0.06 × 7,500 shares = $27,000.
• 45 trades are losers: 45 × $0.04 × 7,500 shares = ($13,500).
• The gross profit is $27,000 - $13,500 = $13,500.
• If commissions are $30 per trade, the profit is $10,350, or $13,500 - ($30 × 105 trades).

Of course, the example is theoretical. Several factors can reduce profits. A risk/reward ratio of 1-to-1.5 is fairly conservative and reflects the opportunities that occur all day, every day, in the stock market. The starting capital of $30,000 is also just an example of a balance with which to start day-trading stocks. You will need more if you wish to trade higher-priced stocks.

Earning Potential and Career Longevity in 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 don’t risk their own money and are typically better-capitalized. They have access to advantageous information and tools.

Some independent trading firms allow day traders to access their platforms and software, but they require them to risk their own capital.

Other important factors that can affect a day trader’s earnings potential include:

• Markets in which you trade: Different markets have different advantages. Stocks are generally the most capital-intensive asset class. Individuals can start trading shares with less capital than with other asset classes, such as futures or foreign exchange.
• How much capital you have: If you start with $3,000, your earnings potential is far less than someone who starts with $30,000.
• Time: Few day traders achieve success in just a few days or weeks. Profitable trading strategies, systems, and approaches can take years to develop.

Day-Trader Salary

Whether they're trading for themselves or working for a trading shop and using the firm’s money, day traders typically don't get paid a regular salary. Instead, their income is derived from their net profit. These profits include what’s left over after deducting trading fees and commissions, the cost of trading software or connections to exchanges, and any “seat fee” paid to a trading firm.

A day trader can have dry spells or experience volatility in their earnings. As a result, many trading firms offer instead a draw in lieu of a salary. This is often a modest amount of money meant to cover everyday living expenses and is drawn monthly. Then, any excess earnings are paid out in the form of bonuses. This also means that if you don’t make enough trading profits to cover your draw, you may end up owing the company money.

There is a great degree of variance in the average day trader's salary, with some day traders making six figures and others losing money.

How To Get Started in Day Trading

Getting started in day trading isn't like dabbling in investing. Any would-be investor with a few hundred dollars can buy shares of a company and keep them for months or years. 

However, the Financial Industry Regulatory Authority (FINRA) sets rules for those whom it defines as pattern day traders (those who execute four or more day trades within five business days in the same account). These rules require margin traders who trade frequently to maintain at least $25,000 in their accounts. What's more, they can't trade if their balance drops below that level.

This means that day traders must have sufficient capital on top of the $25,000 to make a profit. Plus, day trading requires focus. It's not compatible with simultaneously keeping a day job.

Most day traders should be prepared to risk their capital. In addition to required balance minimums, prospective day traders need access to an online broker or trading platform and software to track positions, do research, and log trades. Brokerage commissions and taxes on short-term capital gains can also add up.

Aspiring day traders should factor all costs into their trading activities to determine if making a profit is feasible.

Similarities and Differences Between a Pattern Trader and Day Trader

Pattern traders and day traders have very similar roles. However, there are one or two differences between the jobs. Both pattern and day traders share similar trading strategies and market indicators to make their trading decisions. Also, they both trade quite frequently, at least four trades over five business days. From a regulatory perspective, once those minimum trading frequencies are met, traders are flagged as pattern day traders by their brokers.

Yet there are differences between a pattern trader and a day trader. Pattern traders typically hold their positions over a few days up to several weeks. On the other hand, day traders close their positions within the same trading day. Based on the frequency of transactions, day traders would pay closer attention to the financial markets during trading hours. Pattern day traders would have a little more flexibility when it comes to monitoring the financial markets.

Limitations of Day Trading

While day trading offers an entrepreneurial career route and a high profit potential, there exist some limitations and risks to the profession. These include high financial loss, emotional pressure, lack of access to certain markets, time commitment, and regulatory requirements.

With day trading, there is a high propensity for financial loss, particularly when leverage is involved. This is in addition to any fees and commissions that the day trader already has expensed when entering and exiting positions. Day traders can also succumb to their emotional biases because of all the pressure on the job. Some of the biases include Fear of Missing Out (FOMO), confirmation bias, overconfidence bias, loss-aversion bias, and anchoring bias. Day traders also are limited to highly liquid financial markets that allow them to enter and exit their positions with ease.

Day traders must have extreme focus during the trading day. It takes a significant time commitment. Day traders need to monitor open and potential trades, every trading day. While technological improvements through the use of algorithms and price alerts have given day traders some relief, the time commitment is still necessary.

Finally, there are regulatory requirements for day traders and pattern traders. They include minimum stock and trading-volume limits, as well as margin requirements if the day traders use leverage on certain securities.

The Bottom Line

Day trading isn't a hobby or an occasional activity if you are serious about making money. While there is no guarantee that you will make money or be able to predict your average rate of return over any period, there are strategies that you can master to help you lock in gains while minimizing losses.

It takes discipline, capital, patience, training, and risk management to be a successful day trader. If you’re interested, review the best stockbrokers for day trading to choose the right one for your needs.