Is day trading profitable? Can I make a lot of money day trading? Can I be a millionaire day trading the financial markets? These have been the questions and fears of most new and intermediate traders.
So, in this article, all your questions will be answered. And in answering these questions, we are going to be looking at some very important factors of day trading. Whether day trading is profitable depends on 4 factors. Only when we are have mastered these 4 factors, then day trading can be very profitable.
The 4 Factors That Influence Day Trading
1. Start-up capital
You need a certain level of start-up capital to make money from day trading. Depending on the instrument that you are trading, the margin required may be from 2% for forex to 20% for commodities. Due to the leveraged nature of trading, you do not need to put up the full value of the contract.
For starters, even for a small trading account, you would still need to fund about $10,000.
2. Technique and skill
Another important factor that will determine whether you are profitable with day trading is your level of skills in the techniques being applied. There are many techniques that day traders use to determine entry points, take profit and stop-loss levels.
This ranges from reversion to the mean strategy to moving averages spring strategy and many others more. Moreover, different strategies make use of a range of technical indicators that you would have to master.
We make money from day trading primarily by exploiting 2 concepts. One is the idea of trading in the trend whilst the other is trend reversals. All of the strategies and technical indicators is to help to decide on playing on either one or the other.
You can find out more about the different strategies Here
Another crucial factor that determines how profitable day trading can be is the experience of the trader. A day trader has to be nimble to be profitable. The mantra is to get in fast, get out faster. This takes experience to exploit trend and short term trend reversals within the longer-term trend. This is especially true during times of great volatility surrounding major events and announcements.
Day traders can trade anywhere from 1-2 minutes charts, up to 30 minutes chart. As the time duration is short, the price movement tends to be smaller in magnitude and therefore the size of your position relative to your account capital is crucial in determining your profitability and risk management. All these take experience.
4. Control of emotions and mental strength
One of the most important factors to determine whether you can make good profits from day trading has more to do with your emotions and mental strength rather than anything else.
Day traders cannot let their emotions get the better of them or they will lose a lot of money. To profit from day trading, traders have to keep their emotions in check. When we got it wrong and our position is taken out by the stop loss, we have to continue and set up new trades.
When we have mastered the techniques and strategies and based on our experience, we must be confident that our winning calls outnumber our losing calls. Another way to ensure that our wins will be bigger than our losses is the risk-reward ratio that we set for each trade which is usually 1:2. This means that when we win, we win double our losing trades.
Mental strength is very important in that we must have the mental strength to stick to set up trades based on what is identified. Many times, we tend to end up having more losing trades when we lose this discipline, get overcome by emotions and set up trades that should never have been set up.
Is Day Trading Profitable?
Once you have control of the 4 factors, day trading can be extremely profitable. For the same amount of startup capital, there can be many trading opportunities over the day. With such velocity, as long as we have a risk-reward ratio of 1:2 and executes a higher number of winning trades over losing trades, the profit potential is huge.
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