Day Trading How I Made Money How Day Traders Can Make It

How To Make Money Day Trading (Strategies, Tips, Tricks, Hacks)

How to make money day trading doesn’t have an absolute answer – there are many ways to become a successful and profitable day trader, even though it’s not easy. However, I have been day trading successfully, and in this article, I share some light on how to make money day trading and what you need to focus on to become successful.

Day trading is fast-paced and gives an adrenaline rush. It offers the possibility of making much money quickly if you are good. Unfortunately, most who try day trading fail.

How do day traders make money? Can you make money day trading? I don’t provide you with a day trading strategy, but the correct mindset is required to succeed, which is the best day trading tip I can give you. However, day trading is unlikely to make you rich. Only a few succeed. First, let’s define day trading:

Table of contents:

What is day trading?

Day trading is when you keep no open positions overnight – all positions are closed when the exchange closes, and you are “flat.”

However, overnight is sometimes hard to define. Like the forex market, some markets are open 24 hours a day, and the stock market is open both before and after the official market hours.

The same goes for stock futures, which trade 24 hours a day except for weekends. But no matter what, a day trader has a very short time horizon and wants to roll over his account frequently.

Why is day trading popular?

Day trading is popular because, from the outside, it seems like an easy way to make money. For example, articles about day trading get about twice as many hits as other articles on this website. Moreover, for many, day trading seems like an adrenaline rush.

Why is it that most people think it’s easy money? It’s not, rather, the opposite.

Is it the adrenaline rush? It shouldn’t. The more “boring and dull” you make day trading, the better you should perform. Boring is good in day trading.

Is it the dream of not working for the man and being completely independent? For a lot of people, day trading can be very isolating. It mainly suits introverted people.

Is it the dream of being “left to your own devices”? Left on your own, you suddenly have to take full responsibility for your actions. For many, this is very hard.

Statistics indicate most day traders lose money, and for those profitable, it took years to become consistently profitable. But with the right mindset, you can succeed at day trading.

Why limit yourself to being a day trader?

I never had any goals of becoming a day trader. I chose that path because I had mentors who showed me profitable methods that happened to be day trades. I continued as long as day trading made money until profitability gradually dried up in the decade after the GFC in 2008/09. Markets became less predictable, and the inefficiencies were arbed away. It was then time to move on to other strategies and time frames.

So why limit yourself to day trading? With computers comes leverage in the form of automation. You can diversify into other time frames – both long and short.

In my opinion, minimizing your time frame to only day trading doesn’t make much sense. Most of the best traders I know are agnostic: they trade in whatever time frame that makes sense. Day trading can serve as a helpful diversification strategy in a portfolio of many strategies, but it shouldn’t become a goal in itself.

Day trading is difficult – most will fail because markets are a zero-sum game short term

Before I go on, I’d like to emphasize how difficult day trading is. Understanding why day trading is difficult makes it easier to diagnose what needs to be done to become successful at day trading.

Judging by the statistics circulating on the web, as many as 95% of all day traders fail to make money. I have no idea if this number is correct, but I believe the number is even lower if we look at the day traders who make any meaningful amount of money.

Day trading is a scalable and skewed business where only a few make the most money. It’s practically a zero-sum game, and if you want “easy money,” I believe there are better options than day trading. You should find out what is best – trading or investing.

Day trading is hard because you most likely become the prey, not the predator. The markets are highly complex, with a lot of noise and randomness, and you are competing against some of the smartest and best-equipped traders in the world.

Furthermore, in the short term, most markets are a zero-sum game. On the other hand, the stock market is not a zero-sum game in the long run, as witnessed by the steady rise in value over decades because you own profitable businesses.

Let’s look at some factors you need to overcome by being a day trader:

The main reason why day traders fail is the lack of tailwind

Day traders have no advantage or tailwind. If you’re a swing trader in stocks, at least on the long side, you get the tailwind from the overnight movement in stocks:

How to make money day trading
How to make money day trading

The chart above shows the performance by holding the S&P 500 (the ETF with the ticker code SPY) from the close until the open next day. The CAGR is 9.55% since its inception in 1993, and buy and hold returned 10.2%.

The drift is about 0.04% per day! It’s pretty obvious why shorting the stock market is hard and often a very bad idea. Over time you get nicely rewarded for being an optimist, not a pessimist.

There is almost nothing to be made from the open to the close – it has close to zero returns since 1993:

How to day trade successfully
How to day trade successfully

In other words: swing traders have a nice tailwind from the overnight risk. Ignoring this when you are day trading makes it very hard for yourself.

Day trading is competitive

Most of the volume intraday is done by high-frequency traders (HFT) and bigger funds filling their orders. They are better equipped than you. The markets are becoming ever more efficient as more and more people have received access to the markets through online platforms.

In addition, computerized and algorithmic trading has become much more widely accessible and affordable, resulting in competition not only increasing but also becoming faster and more exact.

What is a successful day trader?

A successful day trader is someone who makes money day trading. Each day trader has his or her own goals, and thus it’s hard to define success. Your first goal should be to write down some realistic goals. Why are you day trading? What are you trying to accomplish? What is your edge or competitive advantage? How are you going to make money?

Your first goal should be to survive and your secondary goal is to make money.

One thing is certain: You won’t get rich quickly day trading. If you do, it’s luck and you’ll most likely lose it just as quickly.

Related Reading: Make Money Online In Trading

What percent do day traders make annually?

A good day trader makes between 10 and 20% annually on the capital employed. Because day traders normally use leverage, it doesn’t make sense to measure returns on your equity but rather the return on your capital employed, which includes leverage.

If your leverage is 3x, the return on your equity is three times greater. Unless you’re exploiting a real inefficiency, we believe it’s hard to make anything better than this over time.

But at the end of the day, you need to measure your returns to your risk. Risk is hard to quantify. In our backtests, we usually use profit factor and the Sharpe Ratio.

Five important factors that determine success (or not) in day trading

Below I list five factors that determine your success or lack of success in day trading:

Your bankroll or starting capital

How much money do you need to be a successful day trader?

The more capital you have, the better chances you have. If you start with anything less than 20,000 USD, you can only trade heavily leveraged products like futures and forex.

In most cases, this ends badly. A lack of experience and leverage is not a good combination! Undercapitalized traders get wiped out by margin calls after random market swings. The main purpose of undercapitalized day traders is to provide food in the food chain.

We suggest a minimum start capital should be 25,000 USD. This lets you trade with no leverage, and you might even manage to trade several products. Preferably, it should be minimum 50,000.

Leverage

Depending on your account size, you are restricted to certain markets. The stock market is more capital-intensive, while, as mentioned, forex and futures are highly leveraged. We suspect the success ratio is lower the more leverage is involved. You’ll get wiped out sooner later if you use lots of leverage.

Effort

Day trading should be your passion. The result is, in most cases, proportional to the effort and rational thinking you put in. Look at day trading as an education.

Personality

Personality: Are you disciplined and/or patient? Can you delay gratification? You better have an understanding of the the correct mindset in trading.

Automation

I believe automation is the way to go. It would be best if you traded many strategies, and you can only achieve that by trading automatically using software and a trading platform.

Before you start – realize that day trading is hard

If you are a swing trader or long-term investor, you have an overnight tailwind to boost your returns. If you look at the total returns in the S&P 500 over the last 30 years, you’ll see that all the gains have come from owning stocks from the close until the next day’s open.

The gain intraday from the open to the close is zero! You are thus saying no to an overnight tailwind!

Can you make money day trading?

Yes, you can make money day trading, but most likely you’ll end up losing. At least that’s what the statistics indicate.

As with other endeavors, day trading requires hard work and lots of discipline. And let’s face it: most day traders lose money, and very few make it worthwhile considering time, effort, and risk.

Many investors and gurus are warning against day trading. In the media, day trading is often described as a casino. For most traders, it is, but day trading can reap good returns for the rational and agnostic quantified trader.

I think the naysayers completely miss the point. Day trading is not very different than, for example, swing trading. The principles are the same. On the contrary, good-day traders can make a lot of money if they find a method that exploits the law of big numbers. It’s highly scalable for most individual traders.

You have a lot of asset classes to choose from, like forex, bonds, options, and stocks. This website focuses on the latter, where the possibility of making money is likely higher. Just in the US, there are about 5,000 stocks to trade.

According to some studies I have covered on this website, most day traders will never make any money (and probably no other way either unless investing for the long-term). Be careful so you can learn and build experience.

Trade as small as you possibly can for at least a year – preferably more. After having day traded for 13 years I’m still astonished I find new things I haven’t thought of. Be humble, and don’t overrate your abilities.

I’ve had four losing months since starting, all in 2012. I think that’s pretty good. In this article, I suggest where to look for trading ideas. Of course, I am not the Delphi Oracle, far from it, but looking back I think certain people have a lot better chance of being successful than others.

At the same time, certain methods will most likely give better results. I know that a lot of traders will disagree. That’s fine. There are infinite ways to succeed. However, I have tested so many day trading strategies (both live and on paper), and I believe certain things have a better survival rate than others.

Some readers might be disappointed after reading this article. There are no answers as to when to buy and sell! If so, most likely, you’re looking for the easy route and let someone else develop day trading strategies for you. No one can do that for you.

My best advice to make money is the following (somehow ranked in the order of importance) and based on day trading stocks only:

How to make money day trading

Let’s look at the main things you need to understand to make money day trading:

Day trading requires experience – aim for survival

This is by far the most important factor. Do you think you are experienced after one year? Think again. You learn something new every day. It takes years.

I have day-traded for over thirteen years, and I’m stunned that I made money the first couple of years, given my limited experience. Looking back, I could have made much money on those day trading strategies with more experience.

The longer you survive, the stronger and fitter you become. It’s like Darwin’s evolution theory. The most adaptable and fittest survive. Nassim Nicholas Taleb writes about the Lindy effect in Antifragile. Taleb never reads books less than one year. Why?

Because books that have “survived” ten years will likely last another ten years. Books that have survived 100 years will most likely be around the next hundred years.

You will never get experience with paper trading and/or backtesting. You have to trade real money. When real money is at stake, you discover potential new strategies/ideas.

If you want to start day trading, you have to accept this is a long-term project. Give yourself at least two years of practice. You have to look for trading edges constantly.

Twice in my career, I have come to a complete halt with my day trading strategies. Both in January 2005 and in the fall of 2011 all my strategies just stopped working. I couldn’t make money. Both times I managed to fight back. In 2005, it forced me to think “outside the box,” and I returned much stronger and profitable for the next years.

My best year of day trading was from 2005 until 2009. If my day trading strategies before 2005 hadn’t stopped working, I wouldn’t make nearly as much in the coming four years. The abrupt stop in trading was a blessing in disguise. When one door closes, another one opens.

However, I have struggled a bit more since the fall of 2011, but since July 2012, I have managed to make some decent money again. All these “comebacks” are due to two things:

First off, I have gained experience and market knowledge, and that experience makes me think/create new day trading strategies. The second is my tip number 2:

Day trading requires thinking outside the box

To survive and prosper in trading you need to be adaptive and creative. Be open, humble, and flexible. Often the counterintuitive could be the best place to start/look. Rory Sutherland has written a fantastic book called Alchemy – The Surprising Power of Ideas That Don’t Make Sense. I highly recommend anything by Sutherland.

Look online for input, but never expect to find profitable day trading strategies. Look for ideas to test. Ask questions. Try to find strategies that no one trades. Realize you have to develop strategies yourself. The trading strategies you find online are mainly untested and based on presumptions. Look at stocks or sectors which are not popular among traders. Look where there is less competition. The more crowded, the less likely to be prey.

There are hundreds of thousands of people trading the S&P 500 and DAX. You compete against very bright people and against machines/software that PhDs have developed (although a Ph.D. might be worthless in the stock market – please read When Genious Failed). Know who you are trading against. Know where you are in the food chain! It would be best if you preyed on weaker players. It’s a brutal marketplace, and you better be prepared for some fights.

Look for structural inefficiencies when day trading

Try to find structural inefficiencies in the stock market and understand how the stock market/exchange operates. Previously I “exploited” the specialist system on NYSE. The NYSE used a specialist (and still uses) a specialist to fill orders. However, that has changed due to algorithmic trading. There is hardly any money to make this route now (as far as I can see). Instead, one has to find flaws in how algos trade.

Computers are stupid, and one can pick up patterns on how the machines trade. I believe short-term movements for about 1-5 minutes are more inefficient than 1-2 hours, not to mention daily movements.

I’ll give an example: Svend Egil Larsen, a Norwegian day trader, found out how the computer algorithm of Timber Hill worked, a unit of US-based Interactive Brokers, would respond to trades in certain illiquid stocks. The stocks would uniformly change prices regardless of how much was bid. He found that he could bump up the price with very small trades and sell with much larger trades for a profit.

He was not the only trader who worked out this flaw, which he called “painfully obvious”. (Charges of market manipulation were brought against Larsen and another trader, Peder Veiby, in a high-profile court case where the public came to look on the duo as heroic Robin Hood figures, beating financial houses at their own game. They were found not guilty in Norway’s Supreme Court in 2012).

Meanwhile, Mr. Larsen – and others – continue to beat algorithms. A few months ago, Larsen said that UBS failed to set a bottom limit on one of its trading algorithms, and he picked up some shares at a discount. He estimates he made $14,000 in a few minutes.

“Every few weeks, an algorithm is going wrong, and there is always someone making money from it,” says Kjell Jørgensen, associate professor at BI Norwegian Business School, to the Norwegian Press.

A perfect example of this happened on the 1st of August 2012: Knight Capital (KCG) lost 440 million USD because of faulty software on US stock exchanges. Their software sold and bought stocks, making share prices go up and down in 148 stocks.

Day traders bought on the way down and sold on the way up. Day traders and algo traders mainly absorbed KCG’s loss.  Some private/home office day traders made tens of thousands of dollars that day by buying from the distressed (KCG).

Every time there is a big failure of an algorithm, for example, due to a “fat finger” or programming error, some traders are always making a lot of money.

The big advantage of finding structural inefficiencies is knowing when the strategy is done and over with. The chances of finding a strategy based on randomness and/or just a market cycle are much less if you know there is some kind of inefficiency. You can also trade a bigger size because you should know that there is an edge.

Day traders need software for automation

Trading platforms are cheaper than ever and necessary to make quantitative or algorithmic trading strategies. You can trade as many strategies as you wish and thus get diversification on both timeframes and markets. Focus on developing trading strategies, and let the trading software do all the automated trading.

Day traders should look for abnormalities

Usually, abnormalities revert to the meanmean reversion strategies. Of course, sometimes they don’t, but this is a numbers game. Opposite, you have trend-following strategies with a much lower win ratio.

Historical quotes can get information on a stock’s distribution pattern. Here is just a very naive and simple method (and serves just as an example):

  1. Find an average price over some past period.
  2. Find the average High-Low range.
  3. Buy when the stock drops x times the average High-Low range, opposite on the short side.

This is a naive strategy, but it serves as an example. Stock prices are NOT normally distributed all the time, occasionally you have the black swan, ie outliers that deviate a lot, potentially negatively skewed. They can sometimes create havoc. But again, trade small and trade many so these outliers don’t ruin the whole strategy.

Day traders should provide liquidity to the markets – act as market makers

Most day traders trade reversion to the mean. That means they provide liquidity for sellers/buyers. The stock market offers risk-taking day traders a different form of compensation. They can earn a premium for providing liquidity for motivated sellers.

Systematic price movements can be exploited with countertrend strategies that buy stocks that are weak/going down. Owners of stock with an urgent need to liquidate their inventory need buyers, and you, as a day trader, can take the opposite side and make money on them.

Day traders should be careful with indicators and charts

Be careful using indicators and/or charts. Many people make money on charts, but I believe finding other alternatives is better.

The best traders I know don’t use charts or indicators. They mainly trade based on quantitative strategies or algorithmic trading. They form hypotheses and make tests based on the scientific method. Many of them trade like market makers. They buy on the downside and sell later during the day.

When you read magazines like Trader’s Magazine, for example, there are unlimited articles explaining possible trading strategies with charts. Typically, they’ll conclude like this: As you can see, this is a robust strategy. The evidence is just some random charts and anecdotal evidence. The strategies are not backtested. The reader has no idea if it is a profitable strategy.

Why doesn’t the writer verify the strategy by quantified analysis? It’s most likely because the strategy is not good and/or testable.

The more testable a strategy is, the better for you. By using numbers and quantified testing, your confidence in the strategy increases. Do your own research. Never make any decisions based on someone else’s research.

Day traders need to rely on the law of big numbers – not day trading tips

Find day trading strategies based on quantified backtesting, and make as many trades as possible. If the average gain per share traded is just 1,5 cents, this amounts to significant profits if you’re trading 100,000 shares a day. The best traders think like an insurance company. You have to calculate an edge in the law of big numbers.

In day trading, your mindset is just as important as the quantified strategies

Your mindset is just as important as trading strategies. There are many investment styles, and you should find out what fits you best.

Get rid of your ego. Be flexible and adaptable. It’s not necessarily the most intelligent that survives but the most adaptable to change.

Resolve your weaknesses and build confidence in yourself. That is a lot easier when you have a defined plan. Accept that you’ll lose money in between.

Controlled losses are simply the cost of doing business. To make money, you have to face risk and uncertainty. Risk-taking involves inevitable losses.

This balance is, of course, very thin, and everything looks so easy in hindsight. But believe me, it’s not easy to make rational decisions when you’re in the middle of the frying pan.

Details matter in day trading

Look at the numbers. Keep statistics. I think introverted traders have a lot of attributes that suit day trading. Certainly, if you’re a sucker for risk, you won’t last long as a day trader. You’ll blow up. It would be best if you had a plan and methodology. A bad plan is better than no plan at all. Be disciplined. Develop a methodology and stick to it unless proven otherwise.

Day traders know when to take a break

When times are good, trade big and delay your planned vacation. Know when to trade, but also when to fold. Only experience can tell you that.

Profitable day traders are humble

Be humble. Be very careful when you’re full of confidence. Confidence is good, but too much will make you take unnecessary risks.

You’re only as good as your last trade

If you made good money in the past, it’s no guarantee that you will in the future. I know a guy who made millions of dollars but later lost everything. As far as I can see, he was a great trader and had a great trading mind. He most likely was not lucky. He understood the game and played it well.

But in the end, he broke his rules and started making trades that were not signaled by his quantitative strategies. He stopped waiting for good trades and instead started making shots. He was trading too much size and developed too much ego. It ended badly.

Be an investment agnostic

You have to be adaptive and flexible. Sooner or later, everything changes, and your day trading strategies become obsolete—the ever-changing market cycles. Don’t despair if that happens. You can return even stronger if you work hard enough.

No one can teach you much. You have to learn this by trial and error. There is no magic strategy.

Profitable day traders focus

Be focused. If you’re trading from home, as many do, ensure you have no distractions from your wife, kids, dog, etc. Buy a nice desk, chair, and computer. These are the best “friends” at the workplace.

Free commissions and lots of info, what can possibly go wrong?

There have never been better opportunities for losing money than now. Free commissions make you overtrade, and lots of information makes you see patterns where there is noise.

As Taleb wrote: If you want to bankrupt a fool, give him information. There is information overload in the marketplace. Please ignore it. Don’t read too many websites, focus on just a few which generate trading ideas. Focus on making trading as simple as possible. You have to focus on yourself and your trading, not on things that are completely out of your control.

Listen to a select few traders

Listen to other traders, but only if you know their track record. Never trade on tips and rumors.

A margin of safety is required for day traders

Benjamin Graham advocated the margin of safety when you invest in stocks.

Likewise, make sure you have a safety margin in your financials. Make sure you have a financial buffer. If you are desperate to make money, surely you’ll fail. The best traders don’t focus on money but on trading. Money is just a way of keeping score. Make sure you never force trades.

Be careful with stop-losses

Many trading coaches and websites focus on the necessity of stops. I believe they are wrong; stops will take you out at the wrong time. Instead, focus on trading small, trading many asset classes, different time frames, and trading styles. Avoid correlation.

The correct mindset is crucial for success in day trading

The best day trading tip we can give you is that you must have the correct mindset. No tools or strategies will help you if you can’t execute and do what your systems tell you to do.

Ensure you understand how you react under stress and make decisions. Keep a trading journal and try to systemize all you do. Please check out my trading journal example.

How long does it take to learn day trading?

It takes many years to learn day trading. However, how long it takes varies from person to person, but we would say it takes years to master. Some might never get the skillset required to day trade, no matter how hard they try.

It takes four years to finish a degree at the university, and it most likely takes longer to “master” the markets – if you ever do. The markets change constantly, and you need to adapt. No degree can help you adapt – that is mainly a personality trait.

How can you speed up the learning process? One option is to enroll in a trading course, but be careful which course you enroll.

Good things don’t come easy – they always require effort and time. Day trading is certainly not an exception. It would be best if you worked hard and, more importantly, to work smart. Suppose you want to reap the benefits of having a skill that allows you to consistently pull money out of the financial markets, especially the stock market. In that case, you must work extra hard to acquire those skills — you must put in the hours for several months or, if necessary, years!

How to make money day trading – how I did it

I day traded full-time (successfully) from 2001 until 2018, mainly as a prop trader.  Below, I partially reveal my numbers to show it’s possible to make money on day trading and also to provide some hints on how to make money on day trading. Furthermore, I explain why you are unlikely to make money day trading.

It is possible to make money day trading, but it requires a lot of systematic and hard work. I will try to provide some hard evidence of how many people are making money day trading and how much, for good or bad.

Today, I will reveal my numbers from 2002 until May 2012.

Let’s first establish some unfortunate facts: even though it is possible to make money day trading, it’s no easy way to riches. Most likely, you will find out this has been a waste of money and/or time. Other businesses have a higher and better survival rate than day trading.

Do swing trading before you do day trading

You are better off trying to swing trade before you start day trading. At least you will have the opportunity to participate in the stock market’s upward bias.

Please check out our free trading strategies to understand what swing trading is all about.

Day traders normally get wiped out quickly

I have been doing day trading since 2002, and I have witnessed a lot of turnover in people starting and quitting, but I happen to know some people who have been doing this longer than I have.

Like any business, this requires preparation and strict discipline. Surviving the 2-3 years of learning is the key to success. I am only trading stocks, and I only know stock traders. No futures, options, or forex for me.

Is it possible to make money day trading?

Let’s look at the summary of my trading statistics from 2002. Hopefully, the numbers can give some motivation for other traders.

This is my key numbers from January 2002 to May 2012:

  • In total, I have traded 2545 days
  • 2182 days have been profitable (net after commissions), ie, 85,7% (2011 and 2012 make the average lower)
  • Two losing months: January 2012 and April 2012
  • Worst day: 16th of August 2007, 22 154 USD in losses
  • Best day: 21st of April 2006, 37 246 USD in profits
  • Best year: 2008 (only eight losing days that year)
  • Best month: October 2008, 220 000 USD
  • Total number of shares traded: almost 170 million
  • Value of shares traded: approximately 5.1 billion USD

Here is a graph showing my accumulated profits since the start (number of days on the x-axis, 2002 until May 2012):

Is it possible to make money day trading
Is it possible to make money day trading

The graph illustrates why many are tempted to day trade: there is no significant drawdown, and you can make decent money from a small deposit.

2006 and 2009 were stellar years. I had just 15 losing days in 2006, 17 in 2007, and 8 in 2008 (net after commissions).

During 2002 and 2003, I built my foundation, and I got to learn and get experience.

However, this graph concludes that the first third is nice, I love the middle third, and the last third is quite depressing.

Why do I write this? This is mainly twofold: to show others it can be done, and it motivates me to work harder and keep looking for edges.

Some random numbers, facts, and statistics from my day trading

Here are some random numbers and facts for 2011 and 2012:

  • Win ratio long trades: 56%
  • Win ratio short trades: 52.21%
  • My total profits split into long/short: long 66% of total profits and short 34%
  • My total profits per weekday: Monday 34%, Tuesday 24%, Wednesday 6%, Thursday 11%, and Friday 25%. I can’t think of why Wednesdays and Thursdays are so bad.
  • Average holding time per stock: 3 hours, 23 minutes, and 17 seconds
  • 3,24 cents profits per share traded
  • Commissions and fees take 16% of my gross profits
  • My most net profitable stock: SPY (Not bad, I only use SPY for hedging purposes when day trading)
  • My most net cumulative profitable stock other than SPY is 3407 dollars (!). Very little, but I trade many different stocks (several hundred).
  • My most net unprofitable stock: -1147 dollars
  • Traded 592 different stocks (my lowest number since 2001, 2002, and 2003)
  • 235 stocks have a net loss
  • I have 13 times as many stocks with profits above 1000 dollars than losers more than 1000 dollars.

The best days compared to total profits day trading

You want to avoid negatively skewed trading strategies. These strategies have fat left tails and might wipe out all your profits from many trades. You need to understand the distribution of your expected profits and losses. Below is my profit distribution:

When I summarized my trading from 2002 to May 2012, I looked at how much of my daytrading profits were generated from the best trading days. Before I did the analysis, I expected the “grinding” (ie. the small profits every day) to be my greatest asset in trading.

It turns out that the 1% best days equal 11% of my total profits. Whether this number is big or low, I don’t know (compared to other traders), but it was smaller than I expected it to be. However, 19 of my best 25 days were in 2008, 4 in 2007, one in 2006 and one in 2005.

Here is a bar graph of all my trading days:

How to succeed in day trading
How to succeed in day trading

What can I learn about this?

  1. When the market conditions are favorable, I have to be there trading. No holidays allowed. I didn’t take holidays in 2006, 2008, 2009, and 2010. In 2012, when conditions were less favorable, I traded lightly and did other things, including investing in stocks.
  2. When the market conditions are favorable, you have to trade size. Looking back, from 2006 until 2010 I should have traded a lot bigger size. I have to go for the jugular when the edge is there!
  3. BUT! Never underestimate the small profits/grinding. They do add up!
  4. Yyou never know when a good day suddenly shows up. First of August 2012 was such a great day for me. I made more money that day than all my trading for 2012 until that day.
  5. I trade too small. My statistics are pretty good, but I have to take a greater risk. Hopefully, my new secondary income in real estate will make me a bit more aggressive.

Making money on day trading

From mid-2011 until mid-2012, I went through a tough time trading. I hardly made any money. At the same time, I was moving to a foreign country and I had a lot of stress.

In June 2012, I did a lot of research and started different strategies. Since then, I have made steady progress and been profitable all months. I’m not making nearly as much as I did in previous years, but I make a decent living out of this.

By writing this blog, I have contacted a Latvian programmer (and trader), and we’ll start trading together in August.

Hopefully, we can automate all trading; at least he has worked with a trading program for the last two months. We’ll start with three different strategies when he’s done. If this program is successful, it will pay back all the work I have put into this blog!

As of now, I’m only trading mean reversion strategies.

Automated profitable day trading

The market changed dramatically in 2011, and I have yet to cope.

I struggled in the first half of 2011, and in June 2011, it got worse when Echotrade planned to change exchange membership and unload foreign residents. I decided to leave Echo for another small prop shop in Canada. This put a hold on my trading for about two months, and I missed the great market conditions in August.

When switching broker/firm, getting to know the software, routines, etc takes a lot of time. I had issues with quotes for about four months, and I felt handicapped. This is one reason for the lower return. Also, I have moved to another country and have been very busy settling.

But the main reason is the widespread use of automated trading, also called “algo” trading.  As far as I can see, algo trading leads to the following:

  • Less volume: Medium-volume and low-volume stocks show a steady decline in share turnover.
  • Thin size on the bid and ask means it gets difficult to put on size without moving the market. Putting on 1000 shares is difficult in stocks with 300,000 to 600,000 daily turnover. You move the market.
  • Very rapid changes in prices. Some stocks move very much and fast in the first 30 minutes. Yes, that could be a good opportunity, but you need good and really fast execution software to take advantage.

You either have to compete with algos or try completely different strategies that theoretically have little impact on algos. Day traders I talk to regularly mention the necessity to have software that can automate everything. As of now, I have decided to try the latter and look for strategies that have the least influence on algo trading.

However, that means I have to adapt to bigger drawdowns, which is psychologically hard. The main problem with the new strategies is that they eventually experience long periods of grinding.

From 2002 until now, I have had the luxury of practically no drawdown. I am having a tough time adapting to drawdowns. It is all about psychology. Before I more or less only traded in the first 60 minutes after the open, but now I need to trade longer and hold much longer. To generate trades, I will use my old and simple API program running with Excel. That has helped me greatly, but it is no tool for fast buying and selling.

For the last two months, I have tested multiple strategies. One is implemented and has proved to be good so far. During June’s slow markets (June has always been the slowest month), I will implement 2-3 more.

Can you make money on day trading? Statistics and numbers

In general terms, I think it’s safe to conclude the following:

  • The majority of day traders lose money, certainly new ones. Day traders’ turnover is very high. The longer you survive, the better your odds of making a living. I know no trader who hits it off right off the bat.
  • However, some surviving day traders are profitable, and some very few make a tremendous amount of money day trading.

Let’s look at some facts and statistics from a failed prop firm:

Tuco Trading and the percentage of profitable traders

Tuco Trading, a professional trading firm based in San Diego, was overtaken by the SEC in March 2008. The reason was “illegal trading” in securities (I won’t go into detail about this case, but this business is very regulated). Almost all the traders were day traders.

However, the court case revealed a lot about the traders’ profitability, mostly day traders. By chance, I got hold of some of the papers from the court case. One paper showed the P/L for each trader for 2007. Given that the papers are correct, they shed some light on profitability. I don’t want to publish the papers, so I’ll just summarize them, and you can make your own conclusions:

  • 206 active traders per 31. December 2007.
  • 33 profitable (16%).
  • 173 unprofitable (84%).
  • 7 with more than 50,000 USD in profits (3%).
  • 57 with losses over 10,000 USD (28%).

Quite bad numbers!

Why do the traders fail? Here’s my take in the order of importance:

  1. Many lack discipline and understanding of how long it takes to learn the markets.
  2. They don’t have the passion and work ethic.
  3. Take too much risk, too extrovert.
  4. The markets are, in the short term, a zero-sum game. Thus, most traders can’t win.

You can’t make it with an average attitude. In a salaried position, you can do ok coming in at 8 in the morning and leaving at 4 PM. In trading, you can, of course, work less, but you have to do what is right or correct. I do reasonably well and spend less than 7 hours a day doing this. This is solely due to my 12 years of experience.

Day trading is a struggle

I think trading is a struggle most of the time: struggle to make money, struggle psychologically to do what is right, and struggle to make decisions. Most people can’t accept this and will ultimately fail. Please read why day traders fail.

Can you make money day trading? Research report

Many traders are asking if day trading is profitable. To investigate, The research paper titled “Can Day Trading Really Be Profitable?” by Carlo Zarattini and Andrew Aziz looked into the profitability of day trading, particularly focusing on the Opening Range Breakout (ORB) strategy.

The study spans from 2016 to 2023, covering periods of bear markets and abnormal volatility events.

The primary objective is to investigate whether day trading can yield significant returns when employing the ORB strategy with leverage compared to a standard buy-and-hold strategy on benchmark indexes in the US public equity markets (Nasdaq or NYSE). Can day trading be profitable?

can-daytrading-be-profitable
can-daytrading-be-profitable

Methodology used in the study

The authors applied a 5-minute ORB strategy to the QQQ ETF, representing the Nasdaq Index.

Let’s look at the trading rules:

  • The strategy involves identifying the high and low points of a stock during the first 5 minutes of trading and executing trades based on breakouts from this range.
  • Stop-loss and profit target parameters were set, with a starting capital of $25,000, a maximum leverage of 4x, and a commission of $0.0005/share traded.

The strategy’s performance was compared with a passive exposure in QQQ, and to address leverage constraints, the authors introduced the use of TQQQ, a leveraged ETF of QQQ.

Can day trading really be profitable? Key findings

Yes, according to the research day trading can be profitable a s long as you use a systematic approach with a backtested trading strategy.

Here are the major findings of the study: Can day trading really be profitable? Let’s have a look:

1. Exceptional outperformance through ORB strategy

The research reveals that the 5-minute ORB strategy applied to the QQQ ETF exhibited remarkable outperformance, with a day trading account initiated in 2016 experiencing a total return of 675% by 2023.

This finding underscores the efficacy of the ORB strategy in generating superior returns compared to a passive investment in the benchmark.

2. Significant annualized alpha and Sharpe Ratio

The day trading portfolio demonstrated a significant annualized alpha of 33% (net of commissions), emphasizing its ability to consistently outperform the benchmark.

The accompanying Sharpe Ratio of 1.12 further highlights the strategy’s efficiency in delivering risk-adjusted returns. Thus, the performance metrics are fantastic.

3. Impactful leverage enhancement with TQQQ

Leverage constraints posed by brokers were identified as a challenge, limiting the full potential of the ORB strategy.

However, the introduction of TQQQ, a leveraged ETF, resulted in an astonishing total return of 1,484%, showcasing the significant impact of leveraging on amplifying returns.

4. Versatile performance across market regimes

The ORB strategy demonstrated resilience and profitability across various market conditions, navigating both bullish and bearish scenarios, including events like the short volatility shock in 2018 (“Volmageddon”) and the COVID-19-induced bear market in 2020.

This highlights the strategy’s versatility in delivering consistent returns.

5. Optimal risk management through sensitivity analysis

A sensitivity analysis revealed that optimal results were achieved with tight stop losses set at 5% of the 14-day Average True Range (ATR) and by keeping trades active until the end of the day (EOD).

This finding empirically supports effective risk management principles, such as “cut losses quickly and let profits run.”

6. Potential for further refinement and optimization

While deliberately keeping the model simple, the study acknowledges the potential for further improvement.

Exploring the sensitivity of results to changes in stop-loss and profit-target parameters suggests opportunities for refinement and optimization in future iterations of the ORB strategy.

Can day trading be profitable? Conclusion

The research contributes valuable insights into the profitability of day trading, particularly employing the ORB strategy with leveraged ETFs.

The study underscores the potential of day trading to generate uncorrelated and substantial returns, with careful attention to risk management and strategic use of leverage.

How To Succeed In Day Trading

How to succeed in day trading can only partially be taught. In this section, I briefly discuss how you can minimize the hurdles to become successful.

To succeed at day trading, I believe you need to be systematic, detailed, and quantitative-oriented.

How can you become a profitable day trader? How to succeed in day trading? How can you make money day trading? I was only day trading (profitably) in stocks and indices from 2001 until 2018. Read below for what we consider important to succeed in day trading:

The trading day is mostly noise and randomness

Day trading attracts many newcomers to the trading scene. That’s perhaps not so strange given that day trading is action-filled and fast-paced. Day trading removes the dreaded overnight risk, even though overnight trading is low-hanging fruit.

But unfortunately, day trading is very hard to master. Most of the action between the open and the close is just randomness and noise, making it extremely hard to make any significant amount of money. Only Jesus has transformed water into wine, and very few traders consistently transform randomness into a big bankroll.

As of writing, in January 2022, we’re in the 12th year of a bull market, and headlines about traders and day traders raking in money pop up frequently. However, don’t fool yourself by reading positive articles based on survivorship bias. Most of these traders later lose parts or all of their capital when the tide turns.

Moreover, we see the current winners, but not the losers. This is explained in the opening paragraph of Rolf Dobelli’s The Art Of Thinking Clearly:

No matter where Rick looks, he sees rock stars. They appear on television, on the front pages of magazines, in concert programmes and on online fan sites. Their songs are unavoidable – in the mall, on his playlist, in the gym. The rock stars are everywhere. There are lots of them. And they are successful. Motivated by the stories of countless guitar heroes, Rick starts a band. Will he make it big? The probability lies a fraction above zero. Like so many others, he will most likely end up in the graveyard of failed musicians.

I don’t want to be negative or pessimistic, but Dobelli’s quote is just as relevant for day trading as for rock stars. We see the winners and not the losers. And the winners are few, unfortunately.

Furthermore, a monstrous P/L doesn’t mean a trader is any good – it could result from luck. There are many profitable traders at any time – just because their style happens to fit the current market. It’s easy to fall prey to survivorship bias: most traders are keen to show P/L statements when they are green, but not so keen to show their performance when they are red.

How to make money day trading – conclusion:

I hope this article on how to make money day trading gives you some indications on what to do. Avoid looking for specific day trading tips and focus on developing your mindset nd making quantifiable trading rules.

Day trading is just as much about having the right mindset in trading as having good trading strategies. A good trader with the correct mindset makes money by following his trading rules, while a bad trader loses money even on good trading strategies.

I managed to make a decent amount of money on day trading by knowing myself very well, and at the same time, using the law of big numbers to trade often and many different day trading strategies. I’m neither smart or intelligent, but I’m disciplined and reasonably rational.

My experience tells me that the day trader who uses some kind of quantifiable rules is more likely to succeed at day trading than the one using anecdotal and discretionary trading.

  • Buy a trading platform like, for example, Amibroker or Tradestation. Learn to code. Knowing 1% of each platform’s capacity is a long way.
  • Make sure you do your research scientifically. Use backtests to test your ideas. The market is full of experts showing anecdotal evidence, and this is unlikely to hold up in a quantified test. Don’t trust any case studies. Do your own research!
  • Keep a trading journal to make sure you know what you’re doing right or wrong. You most likely learn more from your mistakes. Experience is the best teacher! Record all trades and save all the strategies you skip. Later you might have an idea that could improve the result.
  • A profitable mentor is invaluable. Two people think better than one.
  • Create a network of traders. Throwing off ideas back and forth is the best way to improve. The drawback is that most traders are very secretive and keep the best ideas for themselves. However, other traders might give you new perspectives and innovations you didn’t think of.
  • Use a paper account. Never go live with a quantified strategy unless you test it out of sample for a few months. It will never resemble live trading, but it’s a good start and tool.

FAQ:

– What is the key to successful day trading?

The key to successful day trading lies in developing the right mindset, gaining experience, being adaptive and creative, and finding strategies based on quantified testing.

– What are some common misconceptions about day trading?

One common misconception is that day trading is an easy way to make money. In reality, it requires hard work and discipline. Many fail due to unrealistic expectations.

– How long does it take to become a profitable day trader?

It takes many years to become a profitable day trader. Day trading is a long-term endeavor. It’s recommended to practice for at least two years to gain experience and develop profitable strategies.

– How can I succeed in day trading?

Success in day trading requires patience, preparation, and strict discipline. The article recommends that aspiring day traders start with swing trading and learn from their mistakes.

– What are some common challenges day traders face?

Some common challenges day traders face are randomness, noise, steep learning curves, and potential losses if they lack the required discipline.

– What’s the difference between day trading and swing trading?

The difference between day trading and swing trading is that day trading involves buying and selling financial assets within the same trading day, while swing trading focuses on holding positions for several days or weeks.

– How does algo trading impact day trading?

Algo trading has led to various changes, including less trading volume, thin bid and ask sizes, and rapid price fluctuations.

– What challenges do day traders face when competing with algo trading?

Challenges that day traders face when competing with algo trading are the need for fast execution software to compete with algo trading and the difficulty of putting on large positions without moving the market.

– What strategies can day traders use to minimize the impact of algo trading?

Day traders can minimize the impact of algo trading by holding longer, and by using quantifiable trading rules.

– How is negatively skewed trading described, and why is it a concern?

Negatively skewed trading strategies have fat left tails, meaning they can potentially erase profits from multiple trades. This is a concern because it poses a risk to a trader’s overall profitability.

– What does the profit distribution represent in trading?

The profit distribution in trading illustrates how profits are distributed across various trading days, helping traders analyze their trading performance.

– How does the trading approach change based on market conditions?

The trading approach needs to accommodate for favorable market conditions and less favorable conditions. When times are good, you need to trade big, and trade small when conditions are not favorable.

– How can one improve their trading performance during challenging times?

To enhance trading performance during challenging times, consider conducting thorough research, implementing diverse trading strategies, and minimizing external stress factors.

– What is the significance of profitability percentages in trading?

The significance of profitability percentages in trading indicates the proportion of profitable trading days, reflecting the effectiveness of trading strategies. Tracking and improving these percentages is essential for consistent success.

– How can traders manage exceptionally good and bad trading days effectively?

Managing exceptional trading days, whether good or bad, requires discipline and risk management. Profits should be protected, and losses should be controlled with appropriate strategies.

– Is day trading profitable, and how can one become a successful day trader?

Day trading can be profitable, but success requires a systematic, detailed, and quantitative-oriented approach. Success is not guaranteed, and the article provides insights into the difficulty of mastering day trading.

– Why is day trading hard to master, and what are the common pitfalls for day traders?

Day trading is hard to master due to the randomness in daily market movements. Pitfalls include falling for survivorship bias, the challenge of competing against smart and well-equipped traders, and the lack of a tailwind that swing traders enjoy.

– What is the success rate for day traders, and what factors contribute to success or failure?

The success rate for day traders is low, with as many as 95% failing to make any money. Factors influencing success include starting capital, leverage, effort, personality traits like discipline and patience, and having the correct mindset for trading.

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