What is day trading, and do traders make money?

In this article, we will define what day trading is, take a look at the profitability of day trading and whether it's a way to lever your income.

As part of the article intro (and something I will repeat several times throughout the article), I want to emphatically state that although traders do make money,  TRADING IS NOT INVESTING.

“Investing” is letting your money work for you; “trading” is working with your money. Check out my articles on dividend stocks and real estate investment trusts for investing discussions.

Business

Day Trading Financial Instruments

Business Type

Online

Investment

Varies Depending on Brokerage Account – As Low as $500 to Start

Profitability

Varies Based Trading Performance

Lever Rank

10 out of 100

Day Trading Business Model Overview

The business model of trading is the process of buying an item and then selling it for a higher amount at a later date. In the context of this article, we are focusing specifically on trading financial instruments.

Traded financial instruments (securities) include:

  • Stocks (a type of security that gives the stock owner a percentage of ownership in a company)
  • Bonds (a debt security that pays you interest, like a loan)
  • Options (a security that is a contract that gives the owner the ability to buy or sell an asset at a fixed price in the future)
  • Currencies (foreign currencies)
  • Futures (a contract that outlines a future transaction at a set amount)
  • Commodities (a good used in commerce that is interchangeable with goods of the same type)

In addition to buying stock and then reselling that stock at a higher price, financial markets also enable traders to bet on downward price movements.

How do they do this?

Traders “borrow” stock from their brokerage, then sell that stock (that they do not own) and collect the money from that sale. At a later date, they then buy that stock back for less than they sold it for initially (and making a profit on the difference). This process is called “shorting” that stock.

The concept is simple for trading financial markets. You can either “buy low and sell high” or “sell high and buy low” to be a profitable trader.

What is Day Trading?

Day trading is buying and selling of a security within a single trading day. Some of the types of day trading include:

  • High-Frequency Trading (exploiting price inconsistencies across markets)
  • Fundamental Trading (trading financial news)
  • Scalping (taking bits off of small price movements that happen over the day)
  • Range Trading (using technical analysis to determine support and resistance levels to make your trading decisions)

Day trading exploits the price movements of the market to make a series of small profits over and over again.

Understanding Day Trading

Day Trading (and any form of short-term trading) IS NOT INVESTING. Day Trading IS A PROFESSION. Do traders make money? Yes, but trading is a JOB.

To be a professional trader (or professional anything), you need to have a deep understanding of your profession.

Let's take another profession as an example.

A lawyer must complete years of education, then pass the bar exam, and then get hired by a firm. Then they work thousands of hours per year as an associate, and after ten years, make partner at the firm to be successful.

Practicing the profession of trading takes the same dedication and continuous improvement (that's why it's called a “practice”). Understanding the “practice” of trading and being successful requires understanding the markets you work with and understanding yourself.

What do I need to get started with Day Trading?

Getting started with Day Trading is easy; staying in business is challenging.

To get started, you need capital, a brokerage account, and access to a trading platform.

Brokerages that support traders include free trading platforms, research, practice trading accounts, and other tools.

Why? Traders generate enormous commissions for brokerages.

There is a saying –

if you are not paying for it, you are the product.

Take time to understand what that means.

To stay in business as a professional trader, you need to focus on a market, understand risk, deal with the psychological pressures of trading, continue learning, and have a clear plan.

Pros and Cons of Day Trading

PROS AND CONS

Pros

  • Large number of free tools and education available
  • Very profitable (if you are successful)
  • Easy access to markets
  • Multiple types of financial instruments to trade
  • Leverage (magnifies gains)

Cons

  • High risk
  • Very competitive
  • High failure rate
  • Lack of transparency in some markets
  • Volatile nature of financial markets
  • Leverage (magnifies losses)

My Day Trading Approach

I do not day trade.

Day Trading would require me to sit in front of a computer screen all day long to execute trades, which is the opposite of the goal of levered income.

I used to work in the financial markets in the early 1990's and sat in front of my trading desk all day. Back then, I had a Series 7 (General Securities Representative), Series 53 (Municipal Securities Principal), and Series 4 (Registered Options Principal). It was a job. There was no residual income.

I do enjoy the financial markets, artificial intelligence, and creating predictive models and building algorithmic trading robots. Algorithmic trading is another article, as in this article, I am strictly discussing Lever Rank for manual trading.

Day Trading Lever Rank

LEVER RANK

The Levered Income “Lever Rank™” rates tools, platforms, and business models on how much they leverage your time and effort into generating income.

Working a job has a Lever Rank of “1” (1 hour of work generates 1 hour of pay) versus someone that gives you free money (I wish I knew someone like this) that has a Lever Rank of “100”.

Day Trading has a low Lever Rank of 10 due to the risk, competition, time impact, and lack of residual income. Trading is a professional activity (like being a lawyer, doctor, or accountant), trading is not a business.

Pluses that raise the Lever Rank from 1 to 10 include the plethora of tools available to leverage work units and the ability to make large amounts of money.

Going through our shortlist of questions that we try to answer when evaluating a business model:

 

IS THERE A MARKET FOR DAY TRADING?

The financial markets run around the clock around the world. These markets depend on traders to provide liquidity for buyers and sellers.

 

HOW MUCH RISK IS ASSOCIATED WITH DAY TRADING?

There is a lot of risk day trading. 

According to Elliot Wave International, 90% of traders lose money. This number varies depending on the source, but there is a high risk of failure in trading. Elliot Wave also says that 80% of day traders quit within the first two years.

There is risk, but the high failure rate is due to the large number of people beginning trading with no preparation (due to the ease of entry and a “get rich quick” mentality).

 

HOW LONG IN THE FUTURE IS THE BUSINESS EXPECTED TO PAY RESIDUAL INCOME TO THE BUSINESS OWNER?

Day Trading does not pay residual income. The trader needs to work, analyzing trades, performing risk management, and dealing with the psychological pressures of trading.

 

IS THE AMOUNT OF RESIDUAL INCOME FIXED OR DOES IT GROW OVER TIME?

Day Trading does not pay residual income. 

 

HOW MUCH CAPITAL INVESTMENT IS NEEDED TO START DAY TRADING?

Very little capital is needed to start trading. Some currency brokerages will open an account for you with as little as $500.00.

 

HOW MUCH MONEY IS NEEDED TO OPERATE AS A DAY TRADER?

All you need is an internet connection (which you probably already have if you are reading this article) and a computer able to operate your trading software. Advanced information sources, trading education, and analytics software can run into the thousands of dollars per month.

 

HOW MUCH TIME AND EFFORT IS NEEDED TO START DAY TRADING?

Trading is a profession.

To become a professional (in anything) takes a tremendous amount of time, effort, practice, education, and experience. It is something you need to do all day every day. Not very many neurosurgeons started with no education or training.

 

HOW MUCH TIME AND EFFORT IS NEEDED TO RUN THE BUSINESS?

Trading takes a lot of time to operate the business; it is not a business that generates residual income. Trading is a job.  To be a successful trader, you will spend 16 hours a day, learning, practicing, and planning to trade.

 

CAN TRADING LEAD TO OTHER SYMBIOTIC OR SUPPORT BUSINESSES IN THE FUTURE?

Trading can lead to very lucrative branch opportunities such as: 

  • Algorithmic trading development
  • Trading with other people's money (taking a percentage whether you win or lose)
  • Teaching opportunities

 

IS LEARNING HOW TO TRADE HELPFUL TO STARTING OTHER BUSINESSES?

I believe that learning how to trade helps develop other businesses. Take a look at what the profession can teach you.

Can the analytics software be used for different markets (i.e., not financial ones)?

Can the predictive analysis education be applied to other businesses or in the analysis of starting a new business?

Understanding the psychology of markets and market participants is essential for any business owner.

Final Thoughts on Day Trading

Do traders make money?

Absolutely.

You can make a lot of money trading the financial markets, BUT it is a full-time job. Your work is not leveraged and there is no compounding effect like you would have in affiliate marketing.

My focus (and the Levered Income blog) is on the generation of residual income through building businesses. I do not day trade (or short-term trade) financial instruments due to the lack of residual income generated by the work. I much prefer to have capital working for me, versus me working the capital.

I understand the mechanics of trading and technical analysis. I am working to develop branch businesses in the trading industry that generate income without having to watch a trading screen all day and execute trades manually.

Thanks for reading the article, and remember, TRADING IS NOT INVESTING.