Ever since online trading and investing became easily accessible, people from all over the world have been trying to enter the market and get rich. Some would take the patient route, investing in stocks, and waiting for years to earn a sizable profit.
Others turned to short-term trading, buying stocks, foreign currencies, cryptocurrencies, and other assets for only a little while, and selling them as soon as the price movement allowed them to earn some money.
Many even started day trading, hoping to profit off of even the slightest price changes. These days, day trading is more popular than ever. However, you never hear about people becoming millionaires through day trading, which leads to a question that might just shake your determination to become a day trader — is day trading profitable?
A few things to know about day trading
Before we start answering the question of whether day trading is profitable or not, let's back up a little bit and explain a few things about day trading.
For example — what is day trading?
As the name suggests, day trading is trading assets in a single day. That means entering a position and closing it between the opening and closing hours of the market.
This is one method of trading short-term, although short-term could also include trading in a week or even within a single month. However, day trading also has its own subcategories, such as scalping. Scalping is a form of trading that can last only a few minutes.
Whether you trade within minutes or hours, as long as you enter and close a position in a single day — you are a day trader.
The next obvious question is whether or not you can get some money by doing this? The answer is yes, it is possible to earn through day trading. It is not easy, but it is perfectly possible.
You see, whether you trade or invest, you need knowledge, experience, good trading tools, and above all — skill.
You need the knowledge to understand the market and know how to read the signals that it sends. You also need to understand what may impact the prices and in what way. There are countless reasons why the prices move the way they do, and they can include anything:
- The time of the year
- The news that just made headlines
- Geopolitical situations
- Revelations about companies or their executives
- New deals and partnerships
- Financial reports
- Supply and demand
- and more.
You also need experience in order to be able to adapt and know when to cut your losses and when to persist and push through the dips, in order to get to the price surge that will finally give you profits.
You need good trading tools, as day traders rely on technical analysis much more than on fundamental analysis. Fundamental analysis can reveal a lot, but things that it takes into account — especially the market sentiment — are something that is more useful to those whose trades and investments last for longer than a day.
With good trading tools, you can get all the data you need to make your decision for day trades. Of course, you should also have good equipment, which means a fast computer, a stable internet connection, and a reliable power supply, so that you can make decisions and execute them immediately.
Lastly, as said, you need skill. This can also encompass a variety of things, such as your personality, meaning whether or not you are patient enough to wait when you should wait, and act when you should act. Those who do not have patience tend to trade emotionally, which usually leads to losses.
For example, when the prices start to drop, they start to panic and sell immediately in order to avoid losses. In doing so, they suffer losses, as they sold at a lower price than the one at which they bought the assets. If they had the patience to wait, the price may have jumped back up, giving them an opportunity to earn.
So, if you think that you fit the bill and that day trading is for you, then let's talk about whether day trading can be profitable for you.
The profitability of day trading
We already said that day trading is, in fact, profitable. Or at least, it can be. But the real question is how much you can actually earn by day trading?
Unfortunately, due to its nature, it is pretty much impossible to give a precise answer to this question. It depends on countless factors, such as:
- How much money do you use for trading?
- What is your trading strategy?
- What are your risk management practices?
- What assets do you trade?
- Do you trade logically or emotionally?
- How diverse is your portfolio?
- Do you trade with leverage?
- Which broker do you use and how good are they?
- And more.
There are countless things that can determine how much money you can earn and how much money you are going to earn. Even if you do everything right, the way the market itself moves is a massive factor.
Another thing that makes calculating potential gains impossible is the fact that day traders cannot look at their profits from a single trade and decide whether or not they are successful. When you day trade, you will likely enter multiple positions every day. If you go for scalping, you might enter dozens of them every day.
Naturally, some trades will be successful, while others will leave you with nothing but loss. Depending on how much money you used, you may end up losing everything you had at the end of the day, or you may have twice as much by the time you are done.
Usually, traders have to spend days, or even weeks testing out a single strategy in order to see whether or not it works, as you can only calculate trading success over time. You may have days where you see nothing but losses, only for them to be replaced by a day or two where you see massive gains.
If this happens, and the gains exceed the losses, then you are a successful trader. If you give up before the gains arrive, you will be considered an unsuccessful trader simply because you used a strategy that didn't fit those exact market conditions.
Now, you need to be aware of one more thing, and that is that over 80% of traders end up being unsuccessful. This is an uncomfortable truth, but it is still the truth, and you should know it — hopefully before putting your money at risk.
One research from 1999 found that 70% of traders lose all of their money, while only around 12% actually manage to make a profit from short-term trades. Since then, a lot more people have joined the market, which has caused greater volatility. As a result, the situation right now is significantly worse than 20 years ago.
Of course, this only means that the market is more challenging, but not that it is necessarily impossible to succeed.
So, why do traders fail?
Traders tend to fail for a variety of reasons, and while it would be comforting to say that the market is rigged and that you lose money because of that — this is not the case. The truth is that it is the traders' own fault, as they do not take the market seriously enough.
Here are some of the reasons why the majority of day traders lose money.
1) They think that trading is easy
Most people who enter trading online believe that there is nothing much to it. All you need is a broker that won't take too much of your money, an indicator or two, and $500 to start. In a few months, you will be able to sit on a tropical beach, sipping cocktails and entering a few positions per day for a six-figure income, right?
Of course not. Trading takes years of studying the market, testing strategies, winning and failing, and learning from your mistakes.
Trading can be incredibly complex, and every expert out there has dedicated a lot of time, money, and patience to become as successful as they are now. New traders, on the other hand, don't know how much they don't know, and so they think of themselves as professionals because they had a few successful days.
Their greed keeps pushing them to take greater risks, and before long, they lose everything and walk away disappointed.
2) Random reinforcement
Random reinforcement is the tendency of traders to believe that they are doing things properly, just because they were lucky enough to achieve preferable results while doing it.
This is usually the case with new traders who enter the market without preparation, research, or even a decent strategy. Most of them likely don't even know what risk management is.
But, while clearly lacking the knowledge or ability, they sometimes have enough luck to make a few right calls, which further encourages them to take the same approach.
This, obviously, won't work for long, and even in the short-term, these traders are going to lose money. However, one thing to remember is that this could also have catastrophic consequences in the long run, as well.
The reason for this is that traders tend to develop some bad habits for which they do not get punished by the market, and they keep applying them until someday, it backfires and costs them a hefty sum.
3) Trading is stressful and requires a full-time commitment
A lot of traders also tend to lose because they can't handle the pressure. Trading can be incredibly stressful, and the amount of stress rises with the amount of money that you work with.
Nobody would care if there was $10 on the line. But $10 won't bring you any noticeable profits. After all, you don't start day trading to earn 5 cents per trade. Traders tend to go for much larger amounts, such as $500, $1,000, $5,000, or more.
But, that means that they also risk more. While the reward is worth it if you get it, that is a big IF that could end up costing you a lot.
This is also the reason why traders need to seriously dedicate themselves to trading. It cannot be a hobby that you pick up when you have the time and continue from where you left off. It is a full-time job if you want to learn enough and become experienced enough to start earning amounts that you can actually do something with.
4) They follow others' lead
After trading for a bit, traders start gathering experience, and that opens up the truth for them — trading is extremely complex, and there are a lot of levels to uncover and learn about. This only happens to those who manage to approach it with care and an open mind, and who can admit to themselves that they came unprepared, and that it is their fault that things are the way they are.
After this moment of revelation, traders would usually start researching, but only a rare few would do so with the intention of actually understanding the market. The majority would look for shortcuts, which is when they run into websites offering "expert advice," "hot tips," and alike.
Some may even find successful traders and follow their lead, buying and selling blindly, based on the expert's thoughts and predictions. This is also a very wrong approach. Even experts make mistakes, and it is fine to recognize that they know more than you. It is even fine to follow their updates and thoughts on the market.
However, always form your own opinions and conclusions before making a move. If you think that the expert is wrong, you don't act, no matter how much more they make compared to you.
5) Lack of strategy and risk management
Hopefully, by now, you understand that you absolutely cannot trade without a strategy. While we won't recommend any strategies here, we will advise you to do your research, read up on different approaches and trading methods, seek out data about them, their success and risks, and try to decide which one is the best for you.
Once you do, test it in demo accounts, learn everything you can about it, find out what to expect, and whether or not it can bring the sort of income that you are looking to earn.
Only after all of that should you try it out. But, when you do, don't give up on it if you see losses right away. As mentioned before, you cannot decide whether or not a strategy is successful based on a day or two of trading. It might just be a current market trend that is having you see losses, and you need to try it out over a prolonged period of time.
At the same time, be careful not to lose too much while testing a strategy. This is where risk management comes in handy. There are market orders such as stop-loss that come in really handy. They allow you to decide on a price level, which will cause your broker to immediately close your position after being triggered.
You must pick the level wisely, however, and leave the price enough time to fluctuate due to volatility, but not lose too much in case of a crash occurring.
Trading is difficult, and it is dangerous. Never doubt any of these two facts. However, note that it can also be very rewarding if you do it properly. Whether you will suffer losses or earn profits depends on you, and how prepared you come to the market.
Do not allow greed and arrogance caused by a few successful trades to cloud your judgement. Instead, be aware that there is always room to improve and grow as a trader, and always more to learn. Keep that in mind and never stop learning about the market, and you will also become successful someday. It will take time, patience, money, and likely a lot of nerves. But, if you wish to live off of your earnings as a trader, then yes — day trading can definitely be profitable enough to allow that.