There is no way to respond to the query. Day traders rarely reveal their performance to anyone but the Internal Revenue Service (IRS). Given the numerous trading tactics, risk management techniques, and capital quantities accessible for day trading, results also vary greatly.
Yes, it is simple to lose money when day trading. Many individual investors hold undiversified portfolios and trade frequently, speculatively, and to their own harm, according to a study by University of California scholars Brad Barber and Terrance Odean.
Picking the right broker and developing a reasonable trading strategy with appropriate risk management is crucial for day traders because they might potentially incur significant brokerage costs.
How Day Traders Operate
Targeting securities such as stocks, options, futures, commodities, or currencies (including cryptocurrencies), day traders often open and close positions on the same day (hence the term day traders). Before selling positions, they hold them for a number of hours, minutes, or even seconds. Rarely do they stay in one place all night.
Profiting on short-term price changes is the aim. Leverage is another tool day traders can employ to boost profits. Leverage can, of course, also increase losses. For a day trader to succeed, setting stop-loss orders, profit-taking levels, and minimizing risk are essential. Professional traders frequently advise against putting more than 1% of your capital at risk in a single deal. The maximum risk per trade for a $50,000 portfolio is $500.
To effectively manage risk, you must stop one or two disastrous deals from bankrupting you. You can keep your losses to 1% and collect your gains at 1% if you follow a 1% risk strategy, create stringent stop-loss orders, and define profit-taking levels. But doing this requires discipline.
A Day Trading Strategy in Practice Example
Consider a day trading strategy for stocks where the aim is $0.06 and the maximum risk is $0.04, resulting in a risk/reward ratio of 1 to 1.5. With $30k in their account, a trader decides that $300 is their maximum risk per deal. The risk will remain within the $300 cap by trading 7,500 shares ($300/$0.04) per transaction (not including commissions).
This is how such a trading plan might proceed:
- 60 trades result in a profit of $27,000 (60 x $0.06 x 7,500 shares).
- 45 trades go against you: 7,500 shares x $0.04 x 45 = $13,500.
- $13,500 less $27,000 in gross profit is $13,500.
- Profit is equal to $13,500 – ($30 x 105 trades) or $10,500 if commissions are $30 per trade.
The example is obviously hypothetical. Many things can lower profitability. A risk/reward ratio of 1 to 1.5 is considered to be very cautious and accurately captures the opportunities that exist on the stock market 24/7. The $30,000 starting balance is merely an example of a balance with which to begin day trading stocks. If you want to trade stocks with larger prices, you will require more.
If you are interested in more articles like this, here’s one about what causes stock prices to change.