It is true that Day trading is one of the very few professions that can give massive returns. On the other hand, it is also the profession in which a very large group of traders fail to make money.
The 4 Factors That Influence How Much Money Can Be Made From Day Trading
How much potential returns you can make from day trading depends on the following four factors
The Type of Market: The market that you trade can vary – be it stocks, futures, or forex. Each market has its own set of distinctive advantages. For instance, it is cheaper to start trading in Forex or Futures when compared to stocks, as stocks are capital intensive.
Your Initial Investment: This is basically how much money you invest in order to start day trading. The more you can invest initially, the better would be the returns. For instance, a person who starts trading with $3000 will have a lesser income potential than a person who starts day trading with say, $30,000.
Your Trading Knowledge: If you plan to make consistent returns from day trading, you must invest a lot of time in your trading education. If you dedicate to trading education full-time, it would most likely take you a year or more. On the other hand, if you can spare only part-time, it may take you a few years for developing consistency in returns.
Your Personality and Strategies: The trading strategies used by you, as well as your personality – whether you are patient and disciplined – also impacts your return potential.
How Much Money Can You Make As A Day Trader?
Based on certain mathematical calculations we can arrive at the potential money that you can make as a day trader. For those calculations, here are the basic assumptions.
- The risk-reward ratio is assumed to be 1.5:1
- The win rate is assumed to be 50% – which means that 50% of trades are anticipated to be profitable while the remaining 50% is anticipated to be not profitable.
- The number of trades per day is assumed to be 5
- The leverage is assumed to be 1:4
- The initial investment amount is assumed to be $35,000
With a 4:1 leverage and an initial amount of $35,000, your buying power would be $140,000 (4 x $35,000). The maximum you can risk on each trade is $350 (1% of $35,000). At 1.5:1 risk-reward, assume that you make $0.15 on winning trades while you lose $0.10 on losing trades. At an average of 5 trades a day and 20 trading days a month, you roughly make 100 trades per month. As the stop-loss is $0.10, you can take a position size of 3500 shares.
Now, a good trading system is assumed to win 50% of the time. This means that
Profits Made = 50 x $0.15 x 3500 shares = $26,250
Losses Made = 50 x $0.10 x 3500 shares = ($17,500)
The net value = $8750 (excluding commissions and fees).
Assume that the cost per trade is $20. Then, your commission cost = 100 trades x $20 =$2000.
This brings your total money for the month to a total of $6750 ($8750 – $2000), which is nearly 19.2% monthly return.
However, be warned that highly leveraged trades can sometimes cause massive losses.