For most people who start day trading, the ultimate goal is to quit their job and be able to make a living off of the markets. There are two ways to make a living from day trading.
- You could start with a large amount of capital and make a small percentage return to produce a decent monthly income. This requires more capital but less skill.
- The other option is to start with a smaller amount of capital, say $10,000 to $30,000, and generate higher returns in order to make a living. This requires less capital but much more skill.
Below is a blueprint for ramping up your returns to 10 percent or more per month. That way, even if you're starting with $10,000, you'll be making at least $1,000 per month, and that income will grow as your capital and/or returns grow.
Whether you day trade stocks, forex, or futures, align your trading process around the tactics discussed below. With hard work and practice, over the course of six months to a year, you just may be able to become one of the few traders (relative to those who try) who make a living from day trading.
- Whether you day trade stocks, forex, or futures, align your trading process around these tactics.
- Successful trading can be reduced to four factors: risk on each trade (position size), win-rate, reward-to-risk, and number of trades.
- Make hundreds of trades in a demo account to see the win-rate, reward-versus-risk, and number of trades per day it produces.
- After success in the demo account, you can move to trading with real capital.
Day Trading Success and How Long It Takes
Before you can day trade for a living, know what you are up against. Day trading lures throngs of people, yet most of them won't make a profit, let alone a living. Most people who attempt day trading will lose most, or all, of the money they deposit into their trading account.
Very few day traders will be able to make a living from day trading. The chance of making a great living is much smaller. For those who make a living from the markets, it typically takes them six months to a year—dedicating full-time hours (about 30 to 40 hours per week) to education, practice, and trading—before they reach that level.
The blueprint that follows will help you be one of the few traders who can make a living off day trading, potentially pulling returns of 10% or more out of the market each month.
Day Trading Success Reduced to Four Numbers
Create or follow a strategy that allows you to keep these numbers in the target zones, and you will be a profitable trader. Successful trading can be reduced to four factors: risk on each trade (position size), win-rate, reward-to-risk and how many trades you take.
Understanding these four numbers will help you reach your goal of day trading for a living. All off the components/numbers work together.
Capital at Risk per Trade
To be successful, control the risk on each trade. Risk a maximum of 1% of your account on each trade. For example, if you have a $10,000 account, risk up to $100 on each trade.
Place a stop loss order to make sure you don't lose more the 1% of your account. Once you know your entry price and stop loss level, calculate your position size (how many shares, lots, or contracts you take in the stock market, forex market, or futures market).
One percent might not seem like a lot to risk, but winning trades should always be bigger than losing trades. While we only risk 1%, we strive to make 1.5% to 3% on our winners, risking $100 to make $150 to $300, for example. Only risking 1% also means that even if you hit a losing streak of five to ten trades, you haven't lost much capital. A few winning trades, and you have made that loss back. Risk more than 1% though, and a losing streak can decimate your account.
The reward:risk is how much you make on winning trades, relative to how much you lose on losing trades. If you are always risking 1% of your capital, then your reward-to-risk should at a minimum be 1.5:1. That means you are making 1.5% (or more) on your winning trades, and losing 1% on your losing trades. To accomplish this, place a profit target that is a greater distance from your entry point than your stop loss is. For example, if you buy a stock at $10 and place a stop loss at $9.95 (this risk would represent approximately 1% of your account capital, based on your position size) then your target would need to be placed near $10.08. If you lose, you lose $0.05 per share, but if you win, you make $0.08. That is a reward:risk of 0.08:0.05, or 1.6:1. Reward:risk is interlinked with the win-rate.
The win-rate is how many trades you win, expressed as a percentage. If you make 100 trades in a demo account and win 53 of them, your win-rate is 53 percent. Win-rate is interlinked with reward:risk.
Day traders should strive to keep their win-rate near 50 percent or above; that way, if the reward:risk on each trade is 1.5:1 or above, you will be a profitable trader.
Suppose you can maintain a 1.5 reward-to-risk over 100 trades. You are adding 1.5% to your account on winners, and losing 1% of account capital on a loss.
If you win 50 percent of your trades, you are in good shape: 50 x 1.5% = 75% - (50 x 1%) = 25%. You increase your account capital by 25% over those 100 shares. If you win 40% of your trades, then you don't make any money: 40 x 1.5% - (60 x 1%) = 0%.
Do you see how win-rate and reward:risk are linked? If you only win 40% to 50% of your trades, try to bump it up to 50% or more by making small changes to your strategy. Alternatively, you could try to reduce risk slightly or increase your reward slightly to improve your reward:risk. Slight adjustments could push this break-even or losing strategy toward being a profitable one.
Number of Trades
From the numbers above, your goal is to win more than 50% of your trades and make 1.5% or more relative to the 1% you are risking. If you can do that, the more trades you take that still allow you to maintain those statistics, the better.
If you make one trade per day, that is about 21 trades per month. If you win 50% with a 1.5 reward:risk, you make 11 x 1.5% - (11 x 1%) = 5.5%. If you make two trades per day, you win 22 trades and lose 22 trades, but your percentage return increases to 11% for the month.
If you only trade a two-hour period—which is all that is needed to make a living from the markets (this is the end result, and at the beginning you will want to put in at least several hours per day of study and practice)—you should be able to find between two and six trades each day that allow you to maintain the statistics mentioned above. Note that some days produce no trades, because conditions aren't favorable, while other days may produce 10 trades. At an average of four trades per day, if you maintain the above stats, you'll generate a return of 22% on your capital for the month.
Don't take trades for the sake of taking trades though; that will not increase your profit. All trades taken must be part of a strategy that allows you to win 50% or more, with a 1.5:1 or greater reward:risk. If you take trades with a poor probability of winning, or where the reward doesn't compensate for the risk, this will drag down your statistics, leading to a lower return or a loss.
Tying All the Statistics Together
If any of these statistics get out of whack, it will hurt your results. It's a razor-thin line between profitable trading and losing. Over 100 trades, winning 50 means a nice income, while winning only 40 means you break even or lose money when accounting for commissions.
A slight drop in win-rate or reward:risk can move you from profitable to an unprofitable territory. Risking too much on each trade can decimate your account quickly if you hit a losing streak. Winning 50 percent of your trades doesn't mean you will always follow the pattern of win, lose, win, lose, win. Wins and losses are distributed randomly. Some days you may lose all the trades you take, while other days you may win them all. There is no specific number of trades you should, or need, to take each day. However, over many days, it should average out to at least two trades or more a day if you want to eclipse the 10 percent-per-month return mark.
The only way to know if a strategy can produce the numbers above (or better) is to test that strategy out in a demo account. Take hundreds of trades, and if the strategy produces the results above (or better) then you have some assurance—but no guarantees—that the strategy can produce those figures in the future. Small adjustments may be required over time to keep the strategy aligned with the numbers above. If a strategy produces those numbers, then only trade that strategy. Don't trade any strategy that is untested, as untested strategies typically drag down your win-rate and/or reward:risk.
Which Market to Day Trade
The statistics above apply whether you trade stocks, forex or futures—the main day trading markets. Your percentage returns will be similar in each if you create or follow a strategy that maintains the statistics above. Which market you choose shouldn't be based on return potential, as they all offer similar returns. Rather, base your decision on which market you are most interested in and the amount of starting capital you have.
To day-trade stocks, you need at least $25,000. If you have less than $25,000 in trading capital, save up more capital, or day trade futures or forex. For day trading futures, start with at least $7,500. For day-trading forex, start with at least $500. Your initial trading capital is a major determinant of your income. If making 10 percent per month, with a $25,000 account you will make $2,500 in income (less commissions). With a $500 account, you will make $50 (again, less commissions).
Choose the market you are most interested in that allows you to trade with the capital you have available. The less capital you have, the longer it will take to build up your capital to a point where you can make a livable monthly income from it.
The More Capital, the Harder It Is to Maintain High Percentage Returns
Making 10 percent to 20 percent is quite possible with a decent win-rate, a favorable reward:risk ratio, two to four (or more) trades each day and risking one percent of account capital on each trade. The more capital you have, though, the harder it becomes to maintain those returns.
If you are trying to day trade millions of dollars, it is much harder to make 10 percent a month than it is for someone trading a $75,000 account. There is only so much buying and selling volume at any given moment; the more capital you have, the less likely it is that you will be able to utilize it all when you want to. This is typically why only individuals or very small hedge funds can generate huge yearly returns, yet these returns are unheard of when discussing traders or hedge funds with very large accounts.
Final Word on Making 10 Percent Per Month From Day Trading
The math works, and there are many strategies freely available that provide more than two day trades a day, a greater than 50% win-rate, and a reward:risk greater than 1.5:1. Keeping your risk to 1% or less is up to you and should be employed, no matter which strategy you use.
The main problem is that while you can see that the math works over 10 or 100 trades, while you are in a trade it is very hard to remember the big picture. Most new traders can't stand losing, and so they exit a winning trade with a tiny profit, messing up their reward:risk. They hold on to a loser, not wanting to accept the loss, and end up losing much more than 1% on a single trade. That also messes up the reward:risk and could potentially decimate their account.
New traders also need to remember that wins and losses are not evenly distributed. You may win or lose several trades in a row. A winning streak doesn't mean that you are a phenomenal trader and can abandon your strategy. Likewise, a losing streak doesn't mean that you are a bad trader. The only thing that matters is how many trades you win and lose out of 100, which is about how many trades you will take each month. Win more than 50 with a reward to risk of 1.5:1, and you will be a very profitable trader, even if you have a few days in a row where you lose every single trade you made.
Make hundreds of day trades in a demo account using the same strategy to see the win-rate, reward:risk and number of trades per day it produces. Only utilize real capital once you have hundreds of trades' worth of data, and the strategy is showing a profit over those hundreds of trades.