The trading world encompasses a lot of different styles depending on how long traders hold positions open for and how often they are willing to trade at all. Day traders are traders that buy and sell securities within a single day. They almost never hold their trades open overnight and tend to capitalize on the small price movements that occur during one day.
In this article you will learn about how day trading is different from other trading styles, what earning potential day traders have, and how you can become a successful day trader.
Key Takeaways
- Day trading involves buying and selling securities within one day.
- The amount of profit day traders can get depends on their capital, the market they’re trading in, the tools they use, and how much time they’re willing to spend on trading.
- Day traders can be self-employed or work for large financial institutions, which determines what resources are available to make trading easier for them.
- Less than 20% of day traders are making consistent income off day trading. Successful traders manage to do it by developing a solid trading strategy and using risk management tools.
What does a day trader do
Day trading is probably the most popular trading style because it doesn’t require long-term commitment to trades. Day traders tend to trade securities the prices of which tend to change noticeably within one day. This includes stocks, all kinds of currencies, futures or options. Their strategy involves finding securities that are most likely to experience some price fluctuations, opening positions and holding them for a short amount of time, usually for a few hours, but sometimes for just ten minutes or so.
Of course, these price fluctuations can’t be that big. So to make a difference, day traders tend to buy bigger lot sizes, sometimes using leverage to amplify their potential gains. But the key to becoming a successful day trader is consistency in trading and a strong trading strategy that takes into account all the risks associated with this style of trading.
How to become a day trader
Before becoming a day trader, you need to first consider whether you’re ready to turn trading into your everyday job. You will have to spend several hours each day in front of the screen, scanning the price charts and following the news for updates on the financial markets. You also need to be ready to learn a lot as you go because the theory doesn’t cover everything you need to know.
Next, you need to make sure that you have enough trading capital. The more securities you are able to afford, the bigger your potential returns will be. Without a proper capital, it will take a very long time before you see the results you might be hoping for.
After this, learn about the best day trading strategies and risk management. Day trading carries a lot of risk, so having a plan to stick to and a safety pillow will help you mitigate potential losses and save your capital from unsuccessful trades.
Day trading: career paths
Day traders can be self-employed and working from the comfort of their home, or work for a large financial institution. Both options have their own pros and cons. Self-employed traders don’t have to get a degree to work with financial instruments. They keep all their earnings to themselves and can plan their work day in accordance with their own goals. They don’t have a boss hovering over them and don’t need to meet any targets or standards that financial institutions may set for their employees. At the same time, self-employed day traders don’t have much job security, nor do they have any promotion opportunities.
As for the traders employed by large institutions, they must have a degree in finance in order to get hired. The pros of working for big companies is that day traders use the company’s capital to make their trades, so they don’t risk their own money.
Besides, large companies have more capital, so professional day traders have the opportunity to make bigger trades. On the down side, professional day traders are usually salaried employees, so they don’t get to keep their earnings to themselves. They also don’t have the freedom self-employed traders do and must follow their company’s working hours and policies when planning their trading strategy. However, these cons can be seen as advantages because professionally employed day traders don’t have to worry about job security or overworking.
What influences earning potential in day trading
Day trading is a volatile career choice, and your returns depend on a lot of different factors, some of which are outside of your control. But there are some things you can take care of that can help you secure stable profits:
- Capital. We’ve already talked about capital and how important it is for any trader. It is especially important in day trading as you need to buy and sell a lot of securities at once to capitalize on small price movements. Having a capital of $1,000 can buy you more securities than $100 and increases potential profit from future trades.
- Tools. Using professional tools and indicators helps you identify better trading opportunities much quicker than looking for them on your own. Of course, not every tool is available to self-employed traders. In this respect, working for a financial institution is beneficial because it gives you access to better software that can make trading easier and more profitable.
- Time. Day trading is different from longer-term trading styles because you have to spend several hours each day to make noticeable profit. If you don’t trade frequently, you won’t be able to develop a solid trading plan or get consistent income off your trades. This is why it’s virtually impossible to be a day trader while keeping a full-time job at the same time.
Day trader salary
Day trading has long had the reputation of being a high earning career path, but the reality is much more complicated. Day traders’ earnings can be influenced by their skill level, capital, the markets they are working in, the strategy they prefer to use in their work and other factors. According to zippia.com, the average annual salary of day traders in the United States is $116,895. However, this statistic includes only those traders that are able to secure a stable income thanks to their solid capital.
Another thing that is quite hard to calculate is the capital increase. If you only have a capital of $100, a profit of $1,000 means that your total gain reached 1,000%. But this same profit with an initial capital of $10,000 means a capital increase of only 10%. However, this indicator is rarely taken into account in the overall statistics.
But what a lot of people forget to note is that only 20% of traders manage to turn day trading into a stable career. Many traders suffer losses when they first try their hand at day trading and give up before they manage to develop a solid trading strategy. This is why it is very important to plan each trade and write down your price targets early on. Having a well thought-out strategy can save you a lot of trouble in the future and keep you from making mistakes that can cost you your whole trading account.
How many trades can you make in a day as a day trader?
According to trading regulations, you are considered a day trader if you make four or more trades over the course of five business days. However, thanks to the different algorithmic and high-frequency trading tools, day traders can now automatize a lot of tasks and improve their overall productivity. Typically, an average day trader makes from five to thirty trades per day, though with the help of specialized software this amount can be higher.
What is the success rate among day traders?
Day trading is a rather difficult way to make consistent profit from. According to the statistical data gathered by Business Insider, only a small portion of day traders – from 5% to 20% – manage to make it in the trading world and continue to get consistent earnings. The rest of the traders aren’t as lucky and usually burn through their capital without making much profit.
Are there any financial risks in day trading?
The answer is yes. Day traders are at risk of losing money just as much as other traders, especially since in order to make consistent income they often need to risk a large portion of their accounts. In order to minimize their risks, experienced day traders know how to place price targets and stop-loss orders, which helps them limit the amount of losses they might incur.
Conclusion
Overall, day trading can be a very lucrative job, though it does have its hidden dangers. Aspiring day traders need to remember to use risk management strategies and create a trading plan before deciding to commit to day trading fully. Read analytical and educational articles by FBS analysts to take your market understanding to the next level. Don’t stop learning, and be consistent in your decisions. That’s how big players act, and we suggest learning from them.
