Stock Day Trader Income - Hypothesis
The income that the day traders generate through their stock trading process varies due to the individual investors’ trading strategy, risk management as well as market knowledge and experience. This is why it is almost impossible to precisely say in numbers what stock traders' earnings are. Some stock day traders manage to gain a big amount of income while others lose a lot.
While talking about this issue, it is also important to outline several factors about day trading. First of all, it should be noted that if you are trading in the US stock market, in order for you to day trade you need to have a lot of capital. According to US law, a minimum deposit of $25,000 is required for day trading.
In the following paragraphs, we will be taking a look at a good case scenario and a really bad case scenario in order to better understand what income a person can expect from day trading in the stock market. Is it possible to trade for a living
? Or is it a far-fetched dream?
Best Case Scenario
In this best-case scenario let’s assume you start trading with $25,000. In most cases, the stockbrokers will offer you a 4:1 leverage ratio, which means you can buy a total of $100,000 worth of stocks. Let’s suppose you buy shares worth $50 each. Considering the leverage level, you buy 2000. Your goal is to get a profit of around $0.5 per share but you are ready to risk around $0.2 per share. That’s basically setting up take-profit and stop-loss trades.
Now let’s say that you place about 5 trades every day. Considering there are usually 20 trading days in a month that puts you at 100 trades a month. Let’s now assume that 40% of your trades were successful. This means that 40 times out of 100 you made $1000 on your trades (because $0.5x2000=1000), so a total of $40,000 of profit (40x1000=40,000). On the other hand 60% of the time your trades failed. This means you lost a total of $24,000 (because $0.2x2000=400, and 400x60=24,000). So your overall profit is 40,000-24,000 which is $16,000. It’s highly likely that every single one of your trades had a particular amount of commission (let’s assume it was $20 per trade). So you have to pay $2000. The final total you get is $14,000 in a month. This is 56% of your initial investment.
However, every trader should remember that this scenario is hypothetical. It’s very unlikely that you have such successful trades consecutively. Nearly 95% of trades simply lose money rather than gain it. So you should not believe that this case will have an actual execution in real-life trading. Analyzing this hypothetical scenario is good only because it helps traders to better understand how investors generate stock day trader income.
Worst Case Scenario
Worst case scenario is probably the opposite of what we have said above in our hypothesis. According to the same situation, Let’s assume that 20% of your trades were successful. This means that 20 times out of 100 you made $1000 on your trades (because $0.5x2000=1000), so a total of $20,000 of profit (20x1000=20,000). On the other hand 80% of the time your trades failed. This means you lost a total of $32,000 (because $0.2x2000=400, and 400x80=32,000). So it means you experience a loss of 12,000 dollars (20,000-32,000=-12,000).
Traders should know that this scenario is the most likely reality as markets are unpredictable when it comes to day-trading.
What About Regular Stock Trader Income?
When we say regular stock traders we mean stock investors. A stock trader goes into the market for the long term. This means that they buy stocks and hold on to them for a few months or maybe even years. This could be a dividend stock or anything like that. Most people, when they are in it for the long run, buy dividend stocks. It means that each share they own brings them a specific income annually.
For example, imagine you’ve bought $30,000s worth of company shares. The total amount got you 1000 shares, which means each share is $30. The company is then obligated to pay you a yearly dividend from the stock that you own. The percentage here can be quite diverse. It could be 1% or maybe even 20%, it all depends on the company. But just for the sake of the article let’s say it’s 15% based on how cheap a share is for this company.
If the price of the stock does not move for 1 year, you can expect $4500 at the end of the year, meaning you make $375 a month without even moving a muscle. However, traders should not forget that the price of the stock can increase over the years, which means the yearly dividends increase as well.
Most people tend to just deposit all of their life savings in blue-chip stock dividends and then live off of them. But, this is not a fool-proof way to financial security either. Market crashes can severely damage your stock market trader salary source, as they did in 2008 and 2020 for many people when the financial crisis took place all over the world and a lot of people lost a big amount of money.
So it is hard to say precisely what income the regular stock trader will have while trading in the stock market.