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What Is the Success Rate for Day Trading?

D ay trading may appear glamorous, especially when you hear stories about day traders who made incredible profits on the first day, but it takes a lot of hard work and dedication to truly be successful. This high-risk, high-reward form of trading is surrounded by plenty of myths, empty promises, and bad advice, making it difficult to cut through the noise and find out the truth. By learning more about it and the actual success rate for day trading, you can make an informed decision about whether it’s right for you.

What Is Day Trading?

Image via Unsplash by yirage

Day trading is the practice of buying and selling currencies, commodities, futures, options, and stocks within the same day or trading session. The holding positions for these assets is extremely short, usually anywhere from a few minutes to several hours. Day traders ideally close out the day with no open positions, allowing them to avoid the risk of holding particularly uncertain positions overnight.

A day trader’s primary goal is to profit from short-term fluctuations in the price.

In some cases, day traders use leverage to boost their returns — a strategy that can also exaggerate any losses. Though day trading takes place in any marketplace, it is most prevalent in the foreign-exchange (forex) stock market.

Types of Day Traders

There are basically two types of day traders:

  • Professional day traders: Professional day traders work for large financial institutions, like hedge funds or banks. Not only do these individuals have the benefit of professional training, mentors, and access to tools and information, but they also have the advantage of not having to risk their own money on trades.
  • Individual day traders: These traders act independently, relying on their knowledge of stocks, the market, and technical analysis to guide their investment decisions. Additionally, they need access to sophisticated software and tools that can help them understand price movements, trading volume, and chart patterns. They can purchase these tools on their own, but there are also some independent trading firms that give day traders access to their software and platforms as long as they risk their own capital.

What Percent of Day Traders Are Successful?

There’s no question that day trading can provide substantial returns, but the question remains: Are there successful day traders?

According to the day trading statistics on Vantage Point Trading, the percentage of successful day traders is only about 4.5%. In other words, the day trading failure rate is close to 95%. This number can seem a little discouraging, but here’s another statistic: When day traders stick it out for close to a year, the success rate goes up to between 10% and 30%.

Factors That Influence a Day Trader’s Success Rate

It can seem like the small percentage of successful day traders must have just gotten lucky, but there are several factors that impact the earning potential of day traders, such as the:

  • Type of trader: When individuals participate in day trading for a living, the statistics are much better. This is largely thanks to the vast amount of capital and resources at their disposal.
  • Time spent: As with any type of investment, it can take years to learn and develop the rules, systems, and strategies to become truly profitable. Very few day traders see great returns after just a few days or weeks, so it is in your best interest to remain determined and dedicate the time.
  • Markets traded on: Markets, including stock markets, aren’t created equal, and each one has its own unique advantages. In general, stocks require more capital than other types of assets, such as forex or futures.
  • Amount of capital: The more you invest, the higher your earning potential. Though you should start out slow until you get your bearings, keep in mind that you won’t see the same returns as someone investing tens of thousands of dollars.

Getting Started as a Day Trader

If you think you’d like to give day trading a shot, you need a few key things to be successful, including:

Funding

If you want to become a pattern day trader, or a PDT, the Financial Industry Regulatory Authority requires that you maintain an account balance of at least $25,000 to be granted access to the markets. That means that in order to make a profit, you need to have enough capital on top of that already steep requirement to make large investments or numerous trades. Unless you’re a professional day trader working for a financial institution, you’ll need to risk your own capital to do this.

Aside from needing funding to begin trading, it’s also important to note that day trading requires a large amount of time and focus, making it difficult to commit to when you have a day job.

Industry Expertise

Though there are exceptions, day trading usually isn’t an amateur trader’s game. To become a successful trader, you need to have:

  • The discipline that usually comes with experience.
  • A fundamental understanding of how the markets work.
  • Intimate knowledge of specific industries and markets.

Strategy

Employing the right strategy is an important factor in an investor’s success rate. Some of the more popular day trading tactics are:

  • Swing trading: Swing trading is a high-risk, high-reward strategy that relies on technical analysis, price patterns and trends, and a stock’s fundamental value. With this information, traders identify stocks with short-term price momentum to get returns. Day traders who participate in swing trading only hold a position long enough to profit from a significant price fluctuation. Unlike with traditional day trading, investors frequently have to hold on to a position for at least two days and sometimes up to two weeks, increasing the potential for significant gains and losses.
  • Trading news: This strategy offers moderate risks and rewards because it depends on market news instead of technical analysis to inform investment decisions. Put simply, day traders try to react to news quickly enough to capitalize on current events before stock prices have a chance to change.
  • Arbitrage: When day traders attempt to profit from trades by comparing the price differences of securities that should be trading similarly, it is called arbitrage. These traders, known as arbitrageurs, or “arbs” for short, use these comparisons to look for opportunities to buy low and sell high before the markets adjust, a strategy that generally carries low risks and moderate rewards.
  • Mergers and acquisitions: Using this strategy, traders search for companies that are consolidating with or transferring to other businesses, a process that is known as a merger or acquisition. Typically, mergers and acquisitions, or M&A, have a significant impact on stock prices, giving day traders the chance to buy low and sell high in a short period of time. This strategy carries a moderate amount of risk, but the returns can be significant.

Trading Desk

In order to buy or sell stocks quickly and efficiently enough for day trading, you need access to a trading room or trading desk. Professional day traders usually have a direct line to a trading desk, meaning they have the ability to execute orders as soon as there’s a movement in the price. If you don’t have access to a trading desk, you can use a brokerage site or a broker to facilitate your trades.

Analytical Software

Technical information can be an important asset when investing, especially if you’re swing trading. By investing in analytical software, you’ll have access to:

  • Assessments of market conditions.
  • Identified patterns that indicate trading potential.
  • Predicted price movements thanks to complex algorithms.

Reliable Information

Most day traders use a variety of sources for their data so that they can determine the right time to purchase a stock. Day trading can be extremely technical, especially if want to be successful, so be prepared to spend a good deal of time learning and analyzing data.

It’s also important to note that there are plenty of scams out there promising big profits in a short amount of time. Remember just how many day traders are successful and that investors have a much higher chance of losing money while day trading, especially when first starting out. Look out for reliable sources, and avoid any sensationalized advice.

You’ve surely heard an incredible day trading success story at some point, but just like those old fishing tales, the chances of hitting it that big are pretty rare. Even with such a low day trading success rate, there’s an incredible amount of opportunity to generate money through these high-risk, high-reward trades as long as you familiarize yourself with the markets, adopt effective strategies, and dedicate the time needed to gain experience.