The one thing you need to make a living of day trading that nobody tells you

What do you think you need the most to make a living from day trading?

Making a living out of daytrading is something many people strive for. But let’s start with the fact that getting your income from day trading is different for everyone. Because it totally depends on how many expenses you have each month. Some people only need $1000 each month and others need at least $2500 or more. In other words, you need to make at least your monthly expenses on average every month.

However, there is one thing you need to start living from the income you make as a day trader. You need a lot of money to start with. A lot of money is subjective because $10.000 is a lot for some and a small amount for others. But in general, most people would say $10.000 is a lot of money. Besides, if you want to spend $10.000 on day trading you would also need a lot more money in your bank account. Simply because you should certainly not put your entire savings in any investment.

Let’s say you have $10,000 starting capital and you need $1,500 each month to pay all expenses. That means you need to make an average gain of 15% on your total capital each month ($1500 = 15% from $10,000). The amount of gain becomes less if your account grows but you need more gain if you had a bad month. Besides, you need to make money to pay for your expenses. 15% each month equals 180% each year. 

If you start with $10,000 and make 15% on average each month, you’ll have almost $44,000,000 in five years time. Not going to happen. Expect a maximum of 5% gain each month. The top of the top traders make 10% on average max. 10% on average nets you about $3 million in five years. But then you are in the top 0,1% of day traders making the most money. Probably not going to happen. And on top of that, 90% of all day traders lose money. So first you need to be in the top 10% of day traders and then you need to make 5% on average. 

The question is, can you live from 5% gains each month? Based on $10,000 initial capital, 5% = $500 each month. 

The hard part is not making 5% gains in some months. You can even make 10% or 15% sometimes. That is pretty easy even for beginners. The problem is you need to make consistent 5% gains or more a month for many years. In other words, you need a very steady proven / back and forwarded tested day trading strategy that need evaluation each 6 - 12 months. 

You can imagine starting day trading with $1.000 won't get you anywhere anytime soon. 

You need at least $25,000 in capital if you want to day trade stocks

Another thing to note (to make you even more depressed) is that if you want to day trade stocks, you need at least $25,000 in your account. You read that right. According to the FINRA rules:

“According to FINRA rules, you are considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than six percent of your total trades in the margin account for that same five business day period.”

“First, pattern day traders must maintain minimum equity of $25,000 in their margin account on any day that the customer day trades. This required minimum equity, which can be a combination of cash and eligible securities, must be in your account prior to engaging in any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.”

“In addition, pattern day traders cannot trade in excess of their "day-trading buying power," which is generally up to four times the maintenance margin excess as of the close of business of the prior day. Maintenance margin excess is the amount by which the equity in the margin account exceeds the required margin.” 

These rules do not apply for forex,options or futures trading.

There are a few tricks to go around the $25,000 rule but you should be aware that these rules are here for a reason. How to avoid these limitations:

In other words, if you really want to day trade stocks you simply need $25k to start with. If you don’t have that kind of money don’t even bother. If you have an amount below $25k you can’t day trade stocks properly because you are limited to just three trades within five business days. In other words, you can never stick to your plan because your trading days are very limited.

How do day traders make a living?

The fact is, you need a lot of money to be able to have a decent income while day trading. That’s where funded accounts come into play. 

With a funded account you are “borrowing” money from a company (also called prop firm) or person. You can use this money to trade with and make huge profits you normally can’t. In return the company gets a few % each trade you win. You are not actually borrowing money so if you lose some trades you don’t need to pay it back. But if you lose too much your funded account will be closed.

If you see day traders on youtube making a few $1000 a trade is because they all use funded accounts. They are not trading with their own money. They don’t need to risk their own money. Because there is not much risk using a funded account other than you need to comply with their trading rules and you need to pay them a few % each trade.

Your profits are 100 times greater when using a funded account with $100,000 vs $1,000 of your own money. You can never make a few thousand dollars per trade with only $1,000 in captital and decent risk management. But with $100,000 it's pretty easy. If you have a risk / reward ratio of 1:2 (risking 1% and winning 2%) and only win one trade you already make $2,000 ($100,000 * 2% = $2,000). But if you were trading with $1,000 you only make $20. It will take many years to grow a small acount to any substantial amount without taking huge risks.

But getting a funded account is not easy. You need to prove you got a profitable trading system. And in order to keep using the account, your strategy needs to be profitable consistently.

The steps (depending on the company) are as follows:

So you must have a consistent profitable trading system to be able to get a funded account. And before you have a consistent profitable trading system you need to spend at least one to two years learning all basic aspects about day trading and getting the traders mindset (manage your emotions)

With a funded account things are getting much easier. You don’t need impossible high gains on average. You are not risking $100,000 of your own money. You can get a high income with much less effort. For example:

If you have a trading strategy that gives you an average gain of 3-4% a month, that will give you $3000 - $4000 (minus fees) based on $100,000 capital. The only downside is that you have to play by their rules.

Fact is that most day traders don’t have consistent high gains. And 95% of day traders fail to make any money in the first place. So first you need to spend the time to get in the 5% category. A good place to start is my free ultimate day trading guide. Or if you already think you have what it takes you can try to complete the 40 quest day trading quest course. 

The final step in making money in forex is using leverage. Because even if you have $100,000 in capital, you still need to use leverage in order to make a lot of money If you want to maintain a healthy risk / reward ratio. Because your position size is based on your risk. You're not risking your entire account in one trade. The amount of leverage is the same for a small or large account.

Leverage

In forex, it’s only possible to make money using leverage. Because the price moves between currency pairs is so small, you need to buy a lot to make a decent profit. 

For example:

The current (24-06-2022) price in the EUR/USD market is:

Meaning, if you want to buy €1 it will cost you $1.0525. In forex, the price does not change that much. The biggest price move that happened in one day between 2020 and 2022 was about 2 cents. 

Let's assume you take a long position and use your account of $1000. 

The price in forex does not change with cents at the time but rather in very small increments. That's why in forex changes in prices and measurements are done in pips. In forex (depending on the currency pair) the fourth decimal is one pip for $ pairs. In this case, the fourth decimal is a 5 ($1.0525). If the price moved up from $1.0525 to $1.0526, it moved up 1 pip. In the example we used above the price moved to $1.0625, that moves equals 100 pips ($1.0525 to $1.0625). That’s a pretty large move in forex. 

In order to calculate how much money you can make per pip move you need the position size. The position size is the amount of units you buy. In this case we used $10.000 or 10.000 units. 10.000 units * 1 pip (0.0001) = $1. Meaning, every time the price moves 1 pip, you make $1. Or lose $1 if the price moves the other way depending if you take a long or short position.

In the above example the price moved from $1.0525 to $1.0625 which is 100 pips. And because 1 pip move equals $1 you made $100. And that is exactly the same amount we calculated before: 

What's the point of all this? Well, the first thing to note is that in forex you won’t see 100 pips moves every time. More likely than not you’ll see 20-50 pip moves max. In order to make some decent profits from small moves like this you need huge capital. But nobody has $100,000 lying around. That’s where leverage comes into play. With leverage, you are leveraging your capital creating more buying power. If you have $1000 capital and use 100x leverage you now have $100,000 in buying power. That does not mean you now have $100,000 in your account or that your position size changes to $100,000. You just leverage your capital to get more buying power.

The only way to make more money is by increasing your position size, not using higher amounts of leverage.

The amount of leverage is limited to 30x on regulated brokers but if you use a non-regulated broker leverage can go up to 500 or even 1000x (certainly not recommended for any beginner). But also keep in mind that a high amount of leverage can also cause severe losses. The higher leverage you use, the less the price can move against your position before you get liquidated (lose your entire position or account). There is a reason why regulated brokers only offer 30x leverage.

Leverage has some more aspects like the amount of risk (determines your position size), margin, liquidity price and stop losses. This goes beyond this blog but if you want to know more you should definitely read “you can’t avoid risk, you need to manage it”

Your broker automatically determines the amount of leverage based on your position size, risk and stop loss. When you create a broker account you set the amount of leverage account wide. 

Conclusions making a living from day trading

Making some bucks from day trading besides your day job is pretty easy to do if you put in the time. If you want to make a full living from day trading, that is something else entirely. Besides, even if you really wanted you probably don’t have the money. The only way to overcome this is to have a perfect strategy, get your funded account and go from there. But not without understanding all concepts like support and resistance, trends, various indicators, candlestick patterns and more.

And that is where most day traders fail. Not because day trading is very difficult, learning about everything and putting it all together is hard because it takes a tremendous amount of time to figure everything out. It takes at least one to two years of full time day trading (trading and learning almost every day) to become successful. 

It’s pretty much the same path most entrepreneurs take. Only the ones that stay persistent and keep going after each failure will eventually get there. That’s why 95% of day traders fail and only 5% make it. But even if you make consistent profits, you're a long way from becoming a millionaire. Also, don’t be fooled by all the traders on youtube showing off the houses and cars they bought. 99% of the time these traders have multiple sources of income. Think about ads from youtube, selling trading courses etc. It's a serious are hard working job. Don't underestimate it!

If you're up for it start with my Ultimate day trading guide.

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