Anyone with a marginal interest in investing has thought about the possibility of becoming a day trader. There are many types of day traders, ranging from amateurs to dedicated professionals, but they all share some common characteristics.
Typically, day traders make a living exclusively (or near-exclusively) by trading equities at a high volume within the same trading day, sometimes pursuing hundreds or even thousands of trades in a single day.
The idea is to capitalize on small fluctuations in price, rather than long-term trends. Over the course of 10 years, a single investment will likely yield a small, but steady return. Over the course of a day, a single investment may vary wildly; buying at its lowest point and selling at its highest point could yield a return of hundreds or even thousands of dollars in a single trade.
To the experienced investor accustomed to long-term trades, this style sounds more like gambling than a potential career path, but is it possible to make a living with it?
Is Day Trading Profitable?
In some cases, day trading can actually be profitable. As NetPicks points out, many price fluctuations are somewhat predictable, following a clear pattern on any given day. Over time, studying this pattern can help you learn the perfect time to buy a stock, and sell it at the perfect time later in the day.
At high enough volumes, even an increase of one percent could hypothetically provide enough income to sustain your career.
Of course, there are caveats here, most notably that this is not a skill that’s easy for the novice to emulate. Only highly experienced day traders are able to discern these patterns.
The Downsides to Being a Day Trader
There are also a number of downsides to pursuing day trading as a source of income, which even dedicated professionals need to consider:
Volatility swings both ways. First, understand that volatility works in both directions. You might see some strong upward fluctuations that earn you thousands of dollars in a single jump, but you’ll also see strong fluctuations that result in an equal loss. When you’re working with capital in the range of hundreds of thousands, or even millions of dollars, that can be incredibly stressful.
Most patterns are imperfect. Even though you’ll be able to learn common patterns in daytime stock price fluctuations, there’s no such thing as a perfectly predictable, repetitive pattern; if there was, you’d be hearing about a lot more self-made millionaires gaming the system.
While those patterns may work out a favorable percentage of the time, if you rely too heavily on them you’ll end up getting burned.
Each trade costs money. Keep in mind that the majority of the trades you make as an amateur will be associated with a transactional fee. If you’re only paying a few dollars per trade, that may not seem like much, but if you’re making hundreds of trades per day, those costs can add up quickly, eating into your day’s profits and compromising your effectiveness.
Only high volumes work. In part because you’ll be experiencing swings in both directions, and in part because even the best returns you’ll nab will likely be in the range of single-digit percentages, you can only be a successful full-time day trader if you’re trading at sufficiently high volumes.
That means you’ll need to have access to at least six figures, preferably seven or more, of trading capital—and finding someone to trust you with that money (or building it yourself) can be a difficult task.
The Bottom Line on Being a Day Trader
So can day trading be a viable career path? The short answer is no, or at least not the way you’d hope. Making a living as a day trader is possible, but requires serious commitment, years of experience, and a high risk tolerance on top of that.
If you’re not willing to spend the time and take the hits necessary to get to that position, you’ll be better off pursuing a more conservative, long-term investment strategy as your main focus. You can always pursue day trading as a secondary source of income.
As of this writing, Jenna Cyprus did not hold a position in any of the aforementioned securities.