Is Day Trading Profitable?

Ever watched a TV series or a movie where a trader appears to make millions with just a few clicks of a mouse? That's the Hollywood version of day trading—buying and selling securities within a single trading day. It's easy to see why this approach has captured the imagination of so many people-who wouldn't want to work market hours from home, be their own boss, and potentially earn millions?

But what's the reality behind these depictions of success? Day trading can indeed be profitable, but it's exceptionally challenging—and most people who try it end up losing money.

According to both academic and industry research, the success rate in day trading is quite low. Depending on the source, only around 3% to 20% of day traders make money. But that 20% estimate probably has as much to do with the time period studied—the dotcom bubble. It's hard to know for sure, but it's probably fair to say that up to 95% of day traders lose money.

So is day trading still worth pursuing? This article cuts through the hype to provide a practical guide for those considering entering this high-stakes arena.

Understanding Day Trading

Unlike investors who commit to long-term buy-and-hold positions or swing traders who might hold positions for days or weeks, day traders look to turn quick, small profits in a single trading day, liquidating all positions before the market close to protect against risks that could materialize overnight. They can hold positions for hours, minutes, and even seconds. Some trade once a day, while others can trade dozens or even hundreds of times a day.

Day traders attempt to exploit small price changes in highly liquid assets such as stocks, currencies, futures, or options. They use technical analysis as the basis of their trading system and leverage helps them increase their potential earnings (but it can also amplify their losses). Successful day trading demands in-depth market knowledge, swift decision-making, and access to real-time data.

Consider a hypothetical example: A day trader might start their morning looking at a stock that appears to be gapping higher on positive earnings news. They buy 500 shares at $50 and hope to sell at $51 (for a $500 profit). They set a stop-loss at $49.50. After holding for several minutes and seeing the price rise to $50.75, they might decide to exit with a $375 gross profit (before fees and taxes) before momentum fades.

Traders using different systems might trade make dozens or even hundreds of transactions in a day. This is why regulators created specific rules for so-called "pattern day traders"—anyone executing four or more day trades within five business days—requiring them to maintain at least $25,000 in their margin trading accounts.

Challenges and Risks

But why is day trading so challenging? First, it's extremely difficult to predict price movements in such a short-term time frame. While swing traders or position trades can use established trends, and the buying of large institutions, to profit, intraday price movements are often driven more by news and emotion than trends.

Second, even a winning system will lead to consistent losses in the hands of a day trader with poor control of their emotions and impulses. The emotional and psychological biases inherent in human decision-making further complicate day trading, when important decisions must be made quickly.Overconfidence can lead to excessive risk-taking and overtrading, while loss aversion leads to poor decisions like selling winners to early and holding on to losers for far too long.

With the rise of algorithmic, high-frequency trading, amateur day traders are also now competing against professional firms with virtually unlimited resources and advanced technology—all while battling their own psychological biases like fear and greed.

Even if a trader has developed a winning system and mastered their emotions, they still have to overcome slippage and transaction costs and then pay taxes on whatever profits are left. Will they make enough money to live on and continue trading? Probably not.

Is Day Trading Profitable?

While a small number of traders show exceptional success, the uncomfortable truth about day trading profitability is revealed in various academic studies and broker data:

• According to a study by the Brazilian Securities and Exchange Commission, approximately 97% of 1,600 day traders who persisted for more than 300 days lost money.
• One study of day trader profitability put their average net annual return at -$750 (a loss).
• A multi-year analysis of day traders in Taiwan found that a majority lose money in any given year, and less than 1% of the most profitable day traders from the prior year go on to earn positive abnormal returns the next year.
• Active day traders in the U.S. underperform a value-weighted index by an average 10.3% annually.
• Day traders engaging in more frequent and larger trades are more likely to suffer losses.
• An SEC report looking at records of 12 forex brokerages revealed around 70% of retail FX day traders lost money each quarter.

These dismal statistics point to an undeniable conclusion: The evidence is overwhelming that the vast majority of day traders will lose money.

Factors Influencing Day Trading Profitability

Despite the inherent challenges and poor outlook for day trading as a lucrative full-time job, there are certain factors that can influence the probability of success.

For those still determined to try day trading, several tools and resources are essential for getting started:

Factors that Help

1. Capital adequacy: Sufficient starting capital provides a buffer against inevitable losses and allows proper position sizing. Pattern day trader rules require a minimum balance of $25,000 in a margin account, but a buffer is needed to make trades to account for initial losses.
2. Knowledge and skills: A deep understanding of market mechanics, price action, and trading psychology is needed. Books, courses, and mentorship programs from legitimate trading educators are helpful.
3. Disciplined approach: Stick to an objective, predefined trading plan. Maintain focus and diligence. Day traders are only human and like nearly everyone else they can succumb to emotional biases with money on the line. Some of those biases include fear of missing out (FOMO), confirmation bias, overconfidence, loss-aversion, and anchoring bias.
4. Risk management: Limit potential losses with stop-loss orders or trailing stops. Set daily loss limits and keep backups and logs.
5. Technology and tools: Use professional-grade trading platforms, real-time data, and analytical software with reliable internet connections and backups. Many online brokers today offer reliable, low-latency platforms with advanced charting capabilities, order-execution tools, and market-depth information.
6. Market conditions: More liquid, actively-traded securities will have tighter bid-ask spreads.

Developing a Trading Strategy

A robust day trading strategy should include:

1. Entry and exit rules: Have specific, objective criteria for initiating and closing positions.
2. Position sizing: Follow established guidelines for determining appropriate position sizes based on account size, risk tolerance, and expected drawdowns.
3. Loss parameters: Fix maximum loss amounts per trade and per day.
4. Time frames: Understand the specific time frames you'll analyze and trade within.
5. Securities selection: Become familiar with the criteria you'll use for selecting the strategies and securities you'll trade, whether stocks, futures, or forex pairs.

Most brokers and platforms today offer demo accounts for making "paper trades" to help beginning traders test their trading strategies. Before risking real money, new traders should invest time in simulation and paper trading to develop and validate their approach.

The Bottom Line

Day trading offers the allure of quick profits but comes with enormous risks. Indeed, the odds are not in the average day trader's favor. Success requires substantial capital, sophisticated tools, advanced knowledge, psychological discipline, and effective risk management. Even for those with these advantages, only a minority of day traders achieve consistent profitability.