Day trading in stocks is considered an intriguing subject, leading many to wonder about the amount of money stock traders can make in a single day. The amount of money that stock traders earn in a day can vary greatly; some may lose their entire capital, while others leverage their capital to achieve a high monthly income.
Risk Management
Professional day traders – those who work in this field consistently – keep risks on each trade to a very small size, usually less than 1% of their trading capital. For example, if the trading account has $30,000, you should not risk more than $300 on each trade (1% of $30,000). This principle is referred to as position sizing.
Trading Strategy
The strategy can be divided into two parts, in order to address the following scenarios: win rate and profits compared to losses.
The win rate is the number of times you win a trade divided by the total number of trades. If the strategy wins 60 out of 100 trades, the win rate is 60 divided by 100, which equals 60%.
In the initial timeline, a high win rate is what most traders desire, but it only reveals part of the story. If you have a very high win rate, but the winners are much smaller than the losing trades, you won’t be profitable.
In addition to seeking a win rate close to 50% or higher, one must also consider profits compared to losses (the reward-to-risk ratio). Most day traders aim to make winners larger than losers, usually by a factor of 1.5 or more. For example, if the risk is $300 on a trade (the maximum possible loss), the trader aims to earn at least $450 on winning trades.
Scenarios for the Amount of Money Traders Can Make in a Single Day
For the scenario below, let’s assume that winners are 1.5 times larger than losers. The trader has a win rate of 55% and a trading capital of $30,000. No more than 1% of the capital can be risked on any single trade.
Five trades are made each day (including entry and exit). There are 20 trading days in a month, which means a total of 100 trades in a month. Commissions and fees amount to $30 round trip ($15 in and $15 out).
Margin, or leverage of 4:1, is used on the account. This means that although the trader only has $30,000, they can use up to $120,000 as long as all positions are closed before the trading session ends. The $30,000 capital is the recommended balance (the legal minimum is $25,000) to start trading stocks.
Example: Day Trading Strategy in Action
Let’s assume a day trading strategy where the stop loss is set at $0.04, and the target is $0.06.
Your account balance is $30,000, so the maximum risk per trade is $300. With a stop loss of $0.04, you can take 7,500 shares ($300 / $0.04) on each trade and stay within the risk limit of $300 (excluding commissions).
It is important to note that in order to take 7,500 shares, the stock price must be less than $16 (using $120,000 in purchasing power, divided by 7,500 shares). If the stock price is over $16 per share, you will need to take a lesser number of shares. The stock must also have sufficient volume to allow you to take such a position.
Using
This strategy, here is an example of the amount of money you can earn from daily trading in stocks: 55 trades were profitable: 55 × 0.06 × 7,500 shares = $24,750. 45 trades were losing: 45 × -0.04 × 7500 shares = -$13,500. Your net profit would be $11,250 ($24,750 – $13,500). The net profit includes commission costs, which is $8,250 for the month.
This is the theoretical profit, and there are many factors that can reduce your earnings.
A reward-to-risk ratio of 1.5 is used because it is somewhat conservative and reflects the opportunities that occur throughout the day in the stock market. A capital of $30,000 is also an approximate balance to start day trading in stocks; it is recommended to increase the amount if you want to trade in higher-priced stocks.
The stop loss and target were only used as examples. You may need to adjust these numbers based on the stock’s volatility, but they are likely to increase if the stock moves a lot. As the stop loss increases, you will need to reduce the number of shares taken to maintain the same level of risk protection.
Improve Your Strategy
It is often not possible to acquire all the shares you want in winning trades; prices move too quickly. So, let’s assume that in winning trades, an average of only 6,000 shares is acquired. This reduces the net profit to $3,300 instead of $8,250.
Small adjustments can significantly impact profitability.
Some other assumptions were also made in the above example, particularly that the trader is able to find a stock that allows him to use his full capital (including leverage) while employing a reward-to-risk ratio of 1.5. It may be challenging to find five trades in a day some days more than others.
Price slippage is an inevitable part of the trading process. This happens when losses are greater than expected, even when using a stop loss. Price slippage largely depends on the size of the stock, relative to your position size.
To calculate price slippage, reduce your net profit figures by at least 10%. Based on this scenario and the adjustments, you can make about $2,970 from trading an account worth $30,000 (the $3,300 mentioned above, after being reduced by 10%).
Adjust this scenario according to your stop loss and target (average reward-to-risk), capital, price slippage, win rate, average sizes of winning/losing positions, and commissions. Based on the proposed strategy, you can research many of these factors before you start trading to get an idea of how much money you can make.
Amount of Money Stock Traders Can Make in a Day
The above scenario indicates that it is theoretically possible to achieve more than 20% monthly through daily trading in stocks. This is very high by typical standards, and most traders should not expect to achieve this when considering real-world issues such as price slippage and the inability to always get the full position they want in winning trades.
Nonetheless, with a win rate of 55% and a strategy that produces larger winners than losers, achieving 5% to 15% or more monthly is possible, but it’s not easy, even though the numbers make it seem that way. These figures represent what is possible for those who become successful in day trading stocks. Remember that the success rate in day trading is very low.
Can
Forex and futures traders can start with much less capital than the recommended $30,000 for day trading in stocks.
Frequently Asked Questions (FAQs)
How do trading costs and taxes affect day trading profits?
As a day trader, the impact of taxes on trading profits is actually quite simple. Since day trades do not qualify for the long-term capital gains tax rate, profits will be taxed at your ordinary income tax rate.
Your trading costs will depend on factors such as your brokerage and the securities you are trading. Some brokers offer free stock trades, for instance, but charge a commission on options trades, so options traders should account for these additional costs when calculating profit.
How do you calculate trading profit when using margin?
The easiest way to calculate margin in day trading is to find the difference between the value of the trade at opening and the value of the trade at closing. If you used $25,000 in cash and borrowed $2,000…
Source: https://www.thebalancemoney.com/how-much-money-stock-day-traders-make-1031069
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