How Much Do Day Traders Actually Make?

Day trading involves the rapid buying and selling of financial securities within a single trading day, aiming to profit from small, short-term price fluctuations. Unlike traditional investing, which focuses on long-term growth, day traders capitalize on intraday market movements. This article explores the financial realities of day trading.

Statistical Overview of Day Trader Income

The financial outcomes for day traders show that the vast majority experience losses. Studies consistently indicate that 80% to 97% of day traders incur losses, presenting a challenging picture for those entering the field.

Only a small fraction of day traders, 1% to 20%, achieve profitability. Over five years, only about 1% consistently generate profits. One study observed an average net annual return of -$750, indicating an overall loss after expenses. Reported median profits, like $13,000, can be influenced by survivorship bias, overlooking traders who exit due to losses.

The high attrition rate illustrates the difficulty in sustaining a day trading career. Approximately 40% of new traders cease activities within a month, and only 13% continue after three years. Even experienced traders find consistent profitability elusive; one study found only 9% with over 400 days of experience achieved positive lifetime returns. While some lose significant amounts, highly successful traders are exceptional.

Core Financial Drivers of Day Trading Returns

Gross income is influenced by several financial elements. Starting capital dictates the size of positions, magnifying both potential gains and losses. A larger capital base allows greater market exposure, translating into higher absolute profit or loss figures.

Trading volume and frequency are critical components. Day traders execute numerous daily transactions, aiming to accumulate smaller profits from rapid trades. Each executed trade contributes to the overall gross profit or loss, making the number of trades a significant factor. Efficient execution and management of these frequent transactions increase potential gross returns.

Price movements, or volatility, are central to generating income. Day traders seek securities with significant intraday price swings, as these fluctuations create opportunities for quick entries and exits. Different asset classes, such as stocks, futures, or foreign exchange (forex), possess distinct volatility characteristics, influencing short-term gains. Effective analysis of these price dynamics is crucial for identifying profitable trading opportunities.

Leverage plays a substantial role in amplifying returns. Brokers offer margin accounts, allowing traders to control a larger value of securities with less capital. For example, 2:1 leverage enables managing $20,000 worth of stock with $10,000. While leverage can significantly magnify profits, it equally amplifies losses, presenting heightened financial risk.

Operational Costs and Net Earnings

Gross profits are significantly reduced by operational costs and tax obligations, determining a trader’s net earnings. Commissions and fees are primary expenses. While many brokers offer $0 commissions for stocks and ETFs, specific fees apply to options ($0.60-$0.65 per contract) and futures ($0.35-$2.50 per contract). Additional charges may include per-share or regulatory fees.

Real-time market data subscriptions are necessary, as immediate access to price information is critical. Basic data may be free, but comprehensive packages range from $1.50 to over $40 per month. Traders may also incur fees for trading platforms or specialized software, varying from free options to monthly subscriptions costing $29.95 to $99 or more for advanced tools.

Taxes substantially reduce gross profits. Gains from assets held for one year or less are short-term capital gains, taxed as ordinary income (10% to 37%). High-income earners may also be subject to the 3.8% Net Investment Income Tax. The IRS enforces the wash sale rule, disallowing a tax loss if a substantially identical security is purchased within 30 days before or after selling the original at a loss. This rule prevents claiming tax benefits while maintaining market exposure; the disallowed loss is added to the new security’s cost basis.

Active traders meeting IRS “trader tax status” (TTS) criteria, by trading substantially, regularly, and continuously for daily profit, gain tax advantages. TTS allows deducting business expenses, including educational costs, market data subscriptions, and trading software, on Schedule C. A trader with TTS can also elect “mark-to-market” (MTM) accounting, treating gains and losses as ordinary income or loss, bypassing the wash sale rule and the $3,000 capital loss limitation. However, MTM gains are taxed at ordinary income rates, potentially higher than long-term capital gains. The election must be made by filing Form 3115 in the prior tax year. These expenses and tax implications significantly erode gross trading profits, making net earnings lower than initial gross figures suggest.