Do Day Traders Make Money and What the Numbers Say

Day trading is a high-risk, high-reward activity that requires a significant amount of time, effort, and capital. According to a study of 100 day traders, only 3% of them reported making a profit.

The majority of day traders lose money, with 70% experiencing a net loss. This is likely due to the high costs associated with day trading, including commissions, fees, and slippage.

Day traders who are successful tend to have a strong understanding of technical analysis and are able to make quick decisions based on market trends.

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The success rate of day traders is often misunderstood. Only 5% of traders succeed.

Many new traders assume they'll be in this 5% because they think themselves smarter than most. Trading isn't about being smart, it's about being disciplined.

The stats on trader success rates are often quoted, but we need to look beyond the surface. The availability bias comes into play when we see loads of people flaunting their profits online.

We tend to believe what we see most often is representative of all things, including what we don't see. The reality is, there are thousands of members in those groups, and only a few are constantly parading profits.

The firm may show new recruits how well the traders who succeeded were doing, but they're not showing the whole picture. New traders are only seeing one side of the story, the more glamorous side.

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To become a successful trader, you need to put in the hard work and dedication. Very few individuals will succeed in day trading, but by following a defined plan and protocols for improvement, you can increase your chances of success. Efficient work means having a clear plan, not just putting in hours.

A competitive advantage can't be bought; it's up to you to put in the work to make yourself consistently profitable. This includes practicing and honing a specific method for at least 6 months, five days a week, without distractions.

Here are the key elements of a successful trading plan:

By following these steps, you can achieve the end result of trading for 0.5 to 2 hours and making a living, but it requires intense work upfront.

Most traders don't succeed, with a staggering 95% losing money.

The fact that only 5% succeed might make you feel like you're part of the elite group, but that's not necessarily the case.

Trading isn't about being smart; it's about being disciplined and sticking to a methodical plan.

It's a constant task that requires patience and adaptability to life changes, market changes, and more.

New traders often assume they'll be part of the 5% who succeed, but they're misled by online forums and social media where people flaunt their profits.

These are just a few of the many people who are part of the larger group of traders.

The availability bias is at play here, where people believe what they see most often is representative of all things.

You can't know a success rate based on success stories without knowing how many people are also failing.

In reality, there are thousands of traders in these groups, but only a few are vocal about their profits, while many more are silently losing money.

It's essential to look at the bigger picture and not just focus on the glamorous side of trading.

To become a successful trader, you need to put in a lot of efficient work, which means having defined steps and protocols for improvement and measuring that improvement. This hard work can't be bought, you have to do it yourself.

Typically, it takes at least 6 months or more of practicing and honing a specific method, five days a week, to become proficient. Distractions and trying out different things will only extend the time frame.

A trading plan is essential, it's way more than just a couple of strategies you read about online or in a book. It's a business plan that outlines how you will handle everything related to your trading and yourself.

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Developing confidence in your method and in yourself is crucial, and this confidence must be earned by going through the process of creating a trading plan, practicing, and improving problem areas.

To succeed in day trading stocks, you want to focus on stocks with good volume, some volatility, familiarity, and newsworthiness.

Here are the key characteristics of the best day trading stocks:

Day traders often rely on technical analysis, analyzing the movements of stocks on a chart, rather than fundamental analysis, which involves examining company factors.

Becoming a successful trader requires a deep understanding of the markets and a well-thought-out trading strategy.

A trading strategy is a set of rules that guides your buying and selling decisions, and it's essential to have one to avoid impulsive and emotional decisions.

Risk management is a critical component of a trading strategy, and it's crucial to set stop-loss orders to limit potential losses.

A stop-loss order is an order to sell a security when it falls to a certain price, and it can help you avoid significant losses if the market moves against you.

To be a successful trader, you need to have a solid understanding of technical and fundamental analysis, as well as the ability to stay disciplined and patient.

Technical analysis involves studying charts and patterns to predict future price movements, and it's a valuable tool for traders.

Fundamental analysis, on the other hand, involves analyzing a company's financial statements and other factors to determine its value, and it's essential for making informed investment decisions.

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It's essential to consider your financial goals and risk tolerance before diving into trading.

Day trading is hardly worthwhile for most investors, as it's a high-risk approach that can lead to significant losses.

Investing in low-cost index funds that track a broad market index like the S&P 500 can be a more reliable option, with historically higher returns over a long period.

The S&P 500 has an annualized total return of about 10%, not accounting for inflation, making it a more attractive choice for long-term investors.

If you still want to day trade, it's crucial to set aside a certain amount of money you can afford to lose, and don't trade more than that amount or use the mortgage or rent money.

Day trading is a high-risk activity, and it's essential to understand the risks involved. Most day traders lose money, with a 2019 research paper finding that 97% of day traders in the Brazilian equity futures market lost money.

The U.S. Securities and Exchange Commission has also warned day traders about the risks, stating that they should be prepared to suffer severe financial losses. Day traders often rely on borrowing money or buying stocks on margin, which can amplify their losses.

Here are some key risks to consider:

Brokers often claim that only 70% of people lose money while trading with them. This sounds like a relatively low risk, but it's actually a misleading statistic.

In Europe, brokers are required to show how many people lose money, and you'll often see figures like "72% of clients lose money trading with this broker." This might make day trading seem easier than it is.

The truth is, these statistics only include existing clients who are still trading with the broker. They don't include people who lost money and closed their accounts.

Let's say 1,000 people open accounts with a broker over the course of a year. 600 lose some money quickly and close their account, while 400 remain. Of these, 30 are doing well, 70 are profitable, and 300 are losing money. The broker will only count the 100 people who are profitable, making it seem like 25% of clients are successful.

But if we look at the bigger picture, we see that only 100 out of 1,000 people are profitable. And of those, only a portion are doing very well. The real statistic is much more sobering than what brokers want you to believe.

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Day trading is often touted as a way to make quick profits, but the reality is that it's a high-risk activity that can lead to significant financial losses. In fact, a study of day traders in the Brazilian equity futures market found that 97% of them lost money, with only 0.4% earning more than a bank teller's salary.

The U.S. Securities and Exchange Commission has also warned day traders about the risks involved, stating that they should be prepared to suffer severe financial losses. Day traders often rely on borrowing money or buying stocks on margin, which can amplify losses. It's essential to have a solid understanding of risk management strategies to mitigate potential losses.

Day trading can be a stressful and expensive full-time job, and it's not uncommon for traders to experience huge percentage losses. A 2019 research paper found that the most active traders in the Brazilian equity futures market tended to lose the most money. This highlights the importance of having a well-thought-out risk management plan in place.

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To give you a better idea of the risks involved, here are some key statistics:

While some day traders may be able to make significant profits, it's essential to approach this activity with caution and a clear understanding of the risks involved.

Day traders use various techniques to make profits, but it's essential to have a sound and rehearsed method to provide a statistical edge on each trade. This involves remaining flexible and adjusting techniques to match changing market conditions.

Some common approaches include range trading or swing trading, where traders find a stock that tends to bounce around between a low and a high price and buy when it nears the low and sell when it nears the high. Spread trading is another technique that tries to profit on temporary changes in sentiment by exploiting the difference in the bid-ask price for a stock.

To execute these strategies, day traders closely watch a stock's order flow, the list of potential orders lining up to buy and sell a stock. They look for a stock to fall to "support", a stock price at which other buyers step in to buy, and the stock is more likely to rise. To sell, they look for when the stock hits "resistance", a price where more traders start selling and the price is more likely to fall.

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Here are some common day trading strategies:

These strategies require rapid execution and diligent risk management, given the shorter time frame and higher transaction costs. Effective day trading using trend following strategies involves real-time trend analysis and the ability to quickly adjust to market changes.

Day trading requires a solid method to gain a statistical edge on each trade. It's not a game for the faint of heart, and you should never engage in it on a whim.

Some day traders use contrarian investing strategies to trade against irrational behavior from other traders. This approach involves buying a security that's been falling or short-selling a rising one, in the expectation that the trend will change.

To make a profit, day traders need to find securities with good volume, some volatility, and familiarity. You'll want to understand how the security trades and what triggers moves. Will an earnings report hurt the company or help it?

Day traders often rely on technical analysis to make decisions. This involves analyzing the movements of stocks on a chart rather than examining company factors. Some traders also use fundamental analysis, but it's not as common.

Here are some basic trading strategies used by day traders:

These strategies can be used to make a profit, but it's essential to find one that works for you and stick to it.

Trend following is a strategy used in all trading time-frames, assuming financial instruments that have been rising steadily will continue to rise, and vice versa with falling.

Traders can profit by buying an instrument that has been rising or short selling a falling one, in the expectation that the trend will continue. These traders use technical analysis to identify trends.

Trend following can be adapted for day trading, which benefits from identifying and leveraging market trends. This strategy involves clearly defined entry and exit points based on the prevailing market direction.

Research by Szakmary and Lancaster (2015) validates the effectiveness of trend following in the U.S. stock market, demonstrating its potential for generating positive returns.

Effective day trading using trend following strategies requires rapid execution and diligent risk management, given the shorter time frame and higher transaction costs.

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Range trading involves watching stocks that have been rising off a support price or falling off a resistance price, where every time the stock hits a high, it falls back to the low, and vice versa.

This trading style is the opposite of trending, and the goal is to buy the stock at or near the low price and sell at the high.

Range traders look for stocks that are consistently bouncing back and forth between a high and a low price, making it a relatively stable and predictable trading environment.

A related approach to range trading is looking for moves outside of an established range, called a breakout or a breakdown, where prices will continue in that direction for some time.

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Algorithmic trading is a significant player in the stock market, with over 75% of stock trades in the United States being generated by it.

Algorithmic trading uses algorithms and quantitative techniques to make trades, leading to increased competition and smaller profits.

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Retail traders can buy automated trading systems or develop their own automatic trading software to participate in algorithmic trading.

Algorithmic trading is used by banks and hedge funds, making it a widespread practice in the financial industry.

Algorithmic trading systems can be commercially available, allowing retail traders to easily get started with this technique.

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The best trading times are crucial to making profitable trades.

Day traders need liquidity and volatility, which the stock market offers most frequently in the hours after it opens, from 9:30 a.m. to about noon ET, and then in the last hour of trading before the close at 4 p.m. ET.

About a third of all S&P 500 stock trades happen in the final 10 minutes of the trading day, according to data compiled by trading algorithm developer BestEx Research and published by Bloomberg in April 2024.

A day trader might make a few hundred trades in a day, depending on the strategy and how frequently attractive opportunities appear.

Risk Management is a crucial aspect of day trading. It's about limiting your potential downside, or the amount of money you could lose on any one trade or position.

Proper risk management can prevent small losses from turning into large ones and preserve capital for future trades. This is essential to long-term survival.

To manage risk, consider position sizing. Ask yourself, if the trade goes wrong, how much will you lose? For example, if you're trading with $1,000 and the position is 10% of your portfolio, a $100 loss could be devastating.

A good risk management plan also involves setting a level of losses you're willing to endure before selling. This could be based on a percentage of your portfolio or a specific dollar amount.

To preserve capital, have a plan for when to close a position. This could be purely mechanical, such as selling after a certain percentage gain or loss, or based on how the stock or market is trading that day.

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Here are some key risk management issues to consider:

Trading costs are a crucial factor to consider for day traders. Commissions for direct access trading can be as low as 0.5 cents per share or $0.25 per futures contract, depending on the volume traded.

Most brokers in the United States don't charge commissions, especially those that receive payment for order flow. However, this can lead to other costs, such as the bid-ask spread.

The bid-ask spread is the numerical difference between the bid and ask prices, and it's always in favor of the market maker. This means that traders who execute trades immediately will always pay the spread, which can be a significant cost.

Trading costs can be a significant aspect of trading, and it's essential to understand what they are and how they work. The bid-ask spread is a key component of trading costs, and it's the numerical difference between the bid and ask prices.

The bid-ask spread can be viewed as a trading cost for some traders, particularly those who don't want to queue their orders and instead pay the market price. This can result in a loss for the trader.

On the other hand, traders who queue and wait for execution can receive the spread as a bonus. Some day trading strategies aim to capture the spread as additional profits for successful trades.

The bid-ask spread varies depending on market conditions and the specific security being traded. It's essential to be aware of the spread when making trading decisions.

Here's a breakdown of the bid-ask spread:

Rebate trading is another type of trading cost, where traders aim to make money from ECN rebates. These rebates are paid to buyers or sellers who add liquidity to a security by placing limit orders.

When it comes to commission costs, it's essential to understand how they work. Commissions for direct access trading, such as that offered by Interactive Brokers, are calculated based on volume.

The more shares you trade, the cheaper the commission. Commissions are usually 0.5 cents per share or $0.25 per futures contract.

Some brokers in the United States don't charge commissions at all, especially those that receive payment for order flow. This can be a significant cost savings for traders who make frequent transactions.

To be competitive, day traders need market data. A real-time data feed can be obtained by paying fees to the stock exchanges, which are usually low compared to other trading costs.

These fees can be waived for promotional purposes or for customers who meet a minimum monthly volume of trades. Even a moderately active day trader can expect to meet this requirement, making the basic data feed essentially "free".

Some traders purchase advanced data feeds that include historical data and features like scanning large numbers of stocks in the live market for unusual activity. These types of systems can cost from tens to hundreds of dollars per month to access.

Complicated analysis and charting software are other popular additions for day traders.

To start day trading, you'll need a brokerage account, which can be opened in about 15 minutes. This is a crucial first step, as you'll need a platform to execute your trades.

To establish your strategy, you should have an exit plan for each of your investment holdings, which helps you avoid making emotional decisions. This plan is key to making rational decisions, even when losing money.

Day trading requires patience, so don't feel pressured to trade if the situation doesn't meet your strategic criteria. If nothing looks attractive, it's okay to wait for a better opportunity.

Continually reading and staying informed about market news is essential, as big news can impact your positions without any company-specific news. This means you need to stay on top of market trends and be prepared to adjust your strategy accordingly.

If you're not ready to dive into day trading, consider paper trading with a stock market simulator first. This allows you to practice advanced trading strategies with fake cash before risking real money.