First, let’s be clear that we are talking about day trading – it’s different to passive investing. If someone recommends a passive investment fund and that promises a guaranteed 20% per year, be careful!
There may be guru funds where you can expect a significantly better return than the overall stock market, but even they will have bad years. It’s not easy to outperform the general stock market, such as an index fund of the largest US companies. Take a look at the following chart showing the growth of the Dow Jones since 1970 for example:
If you invested $1,000 into the Dow Jones in 1970, you would have $16,357.51 today (not taking into account inflation). That’s an average return of 6.9% per year.
So, how is day trading different?
In day trading, you make more trades. Say a forex day trader takes 1,000 trades per year. Now, the trader needs just a small edge on every single trade – and can reach 50% or even 150% increase on his capital.
Sounds unrealistic? Well, imagine a fruit trader. He also starts with $1,000. Every day, he invests his capital into fruit and sells it on the market. In this sense, he makes 365 trades a year. On some days, he will lose money, but on most days, he will earn money. At the year’s end, he would have earned enough to live from it. It is likely that he would have ended up with much more than $2000 and so increasing a starting capital by more than 100% over the course of a year now sounds much more achievable.
Simulation of a day trading strategy
One great thing about day trading is that, at least for the history, you have all the data. That means that you can take any strategy and see what returns you would have made in the past. Important: this is no guarantee that the strategy works in the future!
So if someone says: “I make 10% every month”, is that credible?
Well, it’s of course possible many traders make this and more – but it’s not likely that he has the same, reliable returns every single month. The trader might mean that on average, he earns 10%. He will still have losing months and still has risks to manage.
But – would he then not become a billionaire after 10 years?
Well, mathematically, you could assume so: $100,000 starting capital and 10% per month would accumulate to more than $9.2 billion after 10 years! This is, of course, completely unrealistic.
Why? Well, every trade influences the market and you need a counterparty for every trade. So you cannot invest any amount of money and get the price you want to trade at
This means you can invest $100,000 – but not $1 million. Without reinvesting any earnings, what would our trader have after 10 years? Well, “just” $1.2 million. And he needs to pay his bills, as well.
The smaller your trades and your trading capital, the easier it will be for you to get the best price. So as a small-scale trader, you even have an advantage. Of course, this ignores the cost of trading – which is higher for a small-scale trader compared to a huge trader (say, a bank). So let’s discuss the cost!
Controlling cost
Many stocks investors know the saying: “Too much trend-chasing leads to the poorhouse”. It means that you should not do too many trades – rather “buy & hold”.
That’s true especially if you buy stocks at a retail bank where the fees on each trade can be high. Luckily, in online trading, brokers offer much lower fees. This is a very important factor, and we recommend that you understand the cost structure of the broker before you chose.
For our partner brokers, you can see a rough cost overview here:
Controlling risk
Even with a good strategy: if you risk too much and run into a streak of bad luck, you can go broke. Controlling that risk is really important. We cannot emphasize this enough.
To reduce the risk, you need two things:
- A good money management strategy.
- The discipline to stick to it.
How much money can professional traders make per month?
Professional traders, often working for hedge funds, investment banks, or proprietary trading firms, can potentially earn substantial amounts of money from trading. However, the earnings of pro traders can vary widely depending on several factors, including:
- Trading Strategy: The profitability of a trader’s strategy plays a significant role in their potential earnings. Some traders may adopt high-frequency trading strategies that aim to profit from small price movements, while others may focus on longer-term positions.
- Capital: The amount of trading capital at a trader’s disposal can impact their potential earnings. With more significant capital, traders can take larger positions and potentially earn higher returns.
- Skill and Experience: Experienced traders with a proven track record of successful trading are more likely to earn higher incomes. Accumulated knowledge, refined skills, and the ability to manage risk effectively are essential for consistent profitability.
- Market Conditions: Market volatility and overall conditions can influence trading profits. Pro traders need to adapt to changing market dynamics to stay profitable.
- Risk Management: Successful pro traders employ rigorous risk management techniques to protect their capital and avoid substantial losses.
- Sector and Instrument Focus: Some traders may specialize in specific asset classes or financial instruments, such as equities, commodities, forex, or derivatives, which can impact their potential earnings.
It’s important to note that trading, especially at a professional level, involves significant risks. Some pro traders may earn substantial amounts, even reaching millions of dollars in a successful year. However, others may experience periods of losses or less consistent earnings.
Additionally, the world of professional trading is highly competitive, and only a small percentage of traders achieve long-term success. Success in trading requires a deep understanding of the financial markets, continuous learning, and disciplined execution of trading strategies.
Hung Trading 