The Average Income of a Successful Day Trader
A day trader's income has many unknown variables, including his capital contribution, skill level, type of trades, risk tolerance, and fees and commissions paid, making it difficult to calculate. Success defined varies across traders and is based on personal goals and lifestyle choices. Technically speaking, a day trader's income potential is unlimited. Fortunes can be realized within minutes but can evaporate even faster, making a career as a day trader a risky proposition.
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Considerations
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A day trader must make several decisions that directly affect her income potential. First, she must decide how much of her own money to use to trade. A primary reason why many day traders fail is insufficient capital. Secondly, she must choose the types of financial instruments to trade. Lastly, she must weigh how much time will be devoted to trading versus the opportunity cost of working at a traditional job with a set salary and hours.
Misconceptions
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Novice day traders entering the market with notions of fast and easy profits will be disappointed. Most traders lose money, a situation that could last months or years while they perfect their trading strategies. A trader's success is defined by his profit and loss, which is a statement that shows the results of each trade and is agglomerated daily. Several profitable trades can be outweighed by huge losses, leading to a total loss for the day.
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Risks
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In trading, it is typical to use leverage through a margin account. In a margin account, a trader borrows additional capital from a broker to increase her buying power. It is not uncommon for day traders to obtain five to 10 times their initial capital, or 50 times that amount if trading foreign currency. Leverage can boost income dramatically; however, it cuts both ways. Losses can lead to a margin call, a request by the broker to inject more money into the account to cover losses or face the possibility of liquidation.
Speculation
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Being a day trader means understanding that losses are an inevitable part of the business. Trades are executed based on probability of success and losses managed using a stop loss, or the allowable level of loss. Setting unrealistic expectations on a trade amounts to speculation, which a successful trader avoids at all costs. Quite often a wining trade is defined by fractions of a dollar. The key is having enough winning trades to cover losses to earn an income.
Potential
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A practical way of figuring out the income for a day trader is as a multiple of invested capital, or the amount he is willing to risk. Experienced traders look to make realistic returns. On a $10,000 investment, a trader may set a goal of earning an annual income of $40,000 to $50,000. However, the definition of what is considered successful to one trader may not be acceptable to another. It is more important to be consistent.
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References
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