A common question among traders who are getting started with trading is …
How much can I make day trading?
Can you turn $1,000 into $1 million? Is there a difference between trading someone else’s money and trading on your own?
How much money do you need to make a decent profit with trading, and can you start with little money? Those and other questions are answered in the following article.
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Trading for a Trading Firm
Traders who trade for a trading firm use the company’s money to trade and grow capital. While all profits belong to the trading firm, traders usually have contracts that grant them a specific percentage of the profits as a bonus.
However, trading for someone else is not a simple task. You’ll need to have a proven track-record to be considered for the position, and the competition for trading jobs in a world-class investment bank is enormous.
According to some sources, up to 2,000 applicants from all over the world apply for a single trading position at those firms! If they’re lucky, they’ll become a junior associate at the trading desk for around two years, after which they can climb the corporate ladder and get offered a more senior trading position – given their results are satisfying during the first two years as a junior trader.
With a more senior position comes more responsibility, but also a better salary. While associates don’t receive a bonus for the profits they generate, senior traders can expect a handsome bonus of a few hundred thousand dollars if they finish the year with a good profit for the bank.
According to Glassdoor.com, the average salary of the top 3 earners in the trading industry is around $570,000, while the national US average is somewhat lower at $89,000. The top trading location is New York, where a trader earns around 30% more than the national average of trading salaries. However, the concentration of banks, trading firms, and hedge funds make New York a very competitive place as well.
As a senior trader gets more experience, the title and bonuses rise until he or she becomes the head of a division, director, or managing partner.
Trading with someone else’s money can be quite difficult from an emotional standpoint. However, the positive side is that you get access to institutional data, successful strategies, and a trading mentor who is usually a senior trader at the trading desk. Most of the time, trading in a trading company also requires certain licenses and qualifications.
In the US, be prepared to take the Series 7 exam, which is the trading license, and the Series 63 exam, which allows you to solicit stock orders within the boundaries of a US state.
Pros and Cons of Trading for a Bank
As you can see, trading for a bank carries a lot of advantages for trades, including a base salary, health benefits, prestige, high bonuses, and limited downside risk since you’re trading the company’s money.
However, there are also some disadvantages. Most traders can’t focus exclusively on the markets as they would wish to as they have to engage with clients, follow strict company rules regarding risk and office politics, and the bonuses are also relatively low compared to the profits the traders make.
Trading for Yourself
The other option to make money with trading is to trade with your own funds. This is the most interesting option for most of us – trade our own money and keep all the profits for ourselves.
However, things are not that easy. As an independent day trader, you’ll have to find the capital needed for your trading account, whereas traders in banks don’t have to invest a dime. We’ll discuss how much money you need to start trading later in this article.
Then there are taxes. Depending on the country you’re living in, you’ll have to pay taxes on short-term capital gains. We’ll cover taxes as well in the following lines.
Advantages and Disadvantages of Trading for Yourself
Just like trading for a trading firm or bank, trading for yourself has certain pros and cons. Let’s start with the pros.
The main advantage of trading for yourself are:
- Freedom, which is one of the main reasons why most of us are attracted to trading in the first place.
- You create and trade your own strategy, control your risks, decide which markets to trade and when to take free time.
- There’s no boss to report to or monthly profit threshold you need to make
The main disadvantages of trading for yourself are:
- The responsibility to find trading capital
- No access to institutional know-how, data, and trading strategies,
- The need to find profitable opportunities and control risk all by yourself
How Much Money Do You Need to Start?
This is one of the most common questions that new traders are asking me: How much money do I need to start day trading? Let’s cover this below.
A day trader can start trading with as much money as they have available to fund their account. This can be $100 or $100,000 – it depends on how much money you’ve saved for trading, your level of experience, whether you have a lot of monthly expenses to cover (rent, bills, mortgage…), and so on.
Naturally, don’t expect to make wonders with a $100 account. Small accounts should really be used just for training and gaining experience. As you save additional funds along the way and your profitability grows, consider adding more money to your account.
Now, to return to the question of real day trading for a living.
This might sound like a very high number at first, and indeed it is.
However, if you want to live on day trading and don’t have any additional income, how do you think you’ll be able to cover your monthly expenses with a $10,000 account? You’ll be out of the game in a matter of months. With a $100,000 account, a 1% monthly increase in your trading capital would cover your entire monthly expenses, and any additional profits could be used to grow your account.
If you have a steady income from another source and don’t have high expenses that need to be covered each month, you may consider starting with less than 100k.
How Much Can You Make Day Trading?
The amount of profits you can make day trading depends on a variety of factors. Not all traders are the same – they differ in their experience, trading discipline, strategy, and ultimately profitability.
Most traders who are profitable in this business average around 20-30% in annual return on their capital. For a $100.000 account, this means around $20k to $30k of profits annually, or around $2,000 – $2,500 of monthly profits. Doesn’t sound like the millions you’re hoping for? And with this kind of return, you’ve actually surpassed Buffett’s annual returns, who has managed to make around 17% annually since 1985!
The other bracket of traders includes those who average around 50% in annual returns. On a $100,000 account, this breaks down to around $50,000 of yearly profits, i.e. around $4,200 monthly.
Finally, at the very top are traders who manage to double their account each year. This requires taking high risks and having a very profitable and efficient trading strategy.
- Learn more, take our premium course: Trading for Beginners
Can I Start with Little Money?
If you don’t have $100,000 to fund your trading account, you can also start with a lower amount. There is no hard rule of how much money you need to start trading. While most brokers accept deposits as low as $100, don’t expect to make a living with your trading profits.
The problem with low trading accounts is that traders often take too large risks to achieve their desired returns. If you want to double a $10,000 account within a month, you’ll have to take advantage of extremely high leverage and increase your risk-per-trade accordingly, which is one of the main reasons why inexperienced day traders blow their account in the first few weeks of trading.
As mentioned earlier, small trading accounts should really be used only to practice trading. Putting the emotional perspective aside, there’s no difference in making 10% on a $1,000 account and making $10 on a $1 million account.
How Taxes Impact Your Profitability
Taxes play an important role in your trading performance. If you make $100k in a year, you won’t bring home the entire amount. Depending on your location, each country has its own laws when it comes to taxing trading profits.
In the US, you will have to pay taxes just like on income from a regular job. Short-term capital gains are taxed the same as ordinary income gains.
Since 2018, the US government introduced slight tax cuts which average around 2% depending on your tax bracket. The following table shows how much you have to pay depending on your trading profits.
If you’re living in the United Kingdom, there are some notable differences to the US taxing system.
If you’re trading speculative products such as CFDs, Forex, or spread-betting where you don’t own the underlying asset, you’ll be free from capital gain tax and income tax.
Self-employed traders in the UK are taxed the same way as any other self-employed individuals, i.e. they’re liable to pay business tax.
If you are from the UK I highly recommend you read this article on how to get started trading in the UK.
Finally, if you’re a private investor, you’ll have to pay capital gain tax on your profits which can range anything from 10% to 28% depending on your current status.
Another important aspect to consider when day trading on your own is risk management, which will also have a significant impact on your bottom line.
Naturally, there are two types of traders:
Risk-averse traders tend to reduce their risk levels at the expense of lower profits, while risk-tolerant traders are happy to take on higher risk for potentially higher profits.
- Learn more, take our free course: Mastering Trading Risk
In trading, reducing risk levels usually refers to having a lower risk-per-trade. For example, risk-averse traders may risk around 0.5% of their account on a single trade to potentially make a profit that equals to 1% of their account, returning a reward-to-risk ratio of 2:1. Those traders can start with a higher trading capital than traders who’re risk-tolerant, as a higher trading account can still return a handsome profit even with a tight risk-per-trade.
Expert Tip: Aim for a reward-to-risk ratio of at least 2 to increase your profitability.
Risk tolerant traders use a higher risk-per-trade to make more profits. A risk-per-trade of up to 3% of your trading account should be enough to generate good profits while still allowing you to control your risk levels. This type of traders can start with a lower trading account than risk-averse traders, as their higher risk levels will still allow them to make a profit on a smaller account.