Last Updated on 20 February, 2021 by Samuelsson
With the advent of the internet and increasing advancement in technology, more and more people are now interested in working and making a living from anywhere they are. The idea that you could quit your job and make a living from day trading stocks is not just fascinating but may also seem like an impossible fantasy. So, you may be wondering, “can I live off day trading?
Yes, living off day trading income is very much possible, but it can be very difficult to achieve. In fact, it’s not necessarily easier or less demanding than doing a regular 9-5 job, and you are not even sure that you can be consistently profitable enough to sustain your lifestyle. However, if you can achieve that consistency, you can comfortably live off your day trading income.
In this post, we will discuss the following:
- What it means to day-trade for a living
- The benefits of day trading for a living
- Why it is difficult to live off day trading
- How much you can make from day trading
- How you can live off day trading income
- The possible drawbacks of day trading for a living
What does it mean to day-trade for a living?
Day trading is a form of financial speculation where the maximum holding period is one day. That is, you trade on financial instruments, such as stocks, currencies, commodities, and so on, but any trade you placed must be closed the same day. The currency and commodity markets are open almost 24 hours a day over many trading sessions around the world, so you can day-trade for longer hours in those markets. But stock markets, which is where we mostly trade, are open only within a stipulated time, so you have only a few hours to make money from the market.
Day trading for a living simply means that you are making enough money from day trading to sustain your lifestyle. But that is not always easy to achieve. To consistently make money in day trading, you must have a good strategy with a proven edge in the market and must also be very efficient in executing the strategy.
But it is not just about the strategy, you must know how to manage risk and have the mental skills to handle the stress associated with day trading. Day trading can be very stressful because you are trading on the lower timeframes where market data are frequently printed, which requires you to be monitoring your screens and analyzing price action all day long. Without the right trading psychology, your emotions, such as fear and anger, can sabotage your efforts.
While you may get up to 4x leverage if you are a pattern day trader, to be able to make reasonable profits that can take care of your living expenses, you need to have a sizeable trading capital. So, if the idea of living off day trading appeals to you, you may have to start saving for your trading capital.
The benefits of day trading for a living
Living off day trading is quite difficult to achieve. However, despite the difficulty, there are some obvious benefits to day trading for a living. Some of them include the following:
- Flexible working hours: You set your own working hours and work whenever you like. With the internet, the world is highly connected, and depending on the broker you are trading with, you can have access to several stock markets around the world. So, you can choose when you want to work, the market you want to trade, and how long you want to trade. You can easily plan your trading activities to fit into other commitments, and if you want a four week holiday, there’s no HR department to navigate first.
- No boss: Essentially, you’re your own boss. There will be no more pandering to the needs of demanding and unreasonable bosses. You can work precisely the way you want, without any office politics.
- Work from home: You won’t need an expensive train ticket to get to work or worry about gasoline and parking costs. All you need is a computer, an internet connection and some capital to get going. No more pricey suits and briefcases.
- Comfort: No more preparations for work or rushing to get to work early. When your neighbors are ironing their shirts and preparing to go to work, you can slip into some comfy clothes and move to your desk and start your day — probably with a fresh cup of coffee. You won’t have to deal with stuffy office or distracting colleagues any more — you work from the comfort of your own home.
Why it is difficult to live off day trading
Despite the benefits, it is not easy to day-trade for a living. In fact, not everyone can achieve it because of the inherent, but surmountable, difficulties associated with day trading. While different people will have different experiences, the common challenges faced by day traders include the following:
- Getting a profitable strategy is difficult: The market has become very competitive, with both institutional and retail traders deploying trading algorithms and AIs to trade for them, so finding a trading strategy with an edge in the market is extremely tough, especially when it is for discretionary trading. The only way to stand the competition is to also make use of algorithmic trading systems, but developing them is quite difficult. You will need to find an edge in the market first and then code an algorithm based on that edge. After that, you have to backtest on historical price action to ascertain the performance and go ahead to forward-test it in a real-market environment before launching it to trade your account.
- Day trading can be time consuming: Day trading can be time consuming. You will need to be in front of your screen all day monitoring the market — either looking for new trading opportunities or trying to know when it’s time to close your open positions. Because you trade on intraday timeframes, such as 30-minutes and 15-minutes, market data are printed very often, and you must analyze them. Even if you want to automate your trading with algos, creating and testing the algos takes time too.
- You will battle with your emotions: One of the toughest battles you will face as a day trader is keeping your emotions under check so that they don’t sabotage all your efforts. Your greed can make you jump the guns or start chasing missed trades, while your fear may hold you from taking qualified trades or make you cut your profits too early. But what is even more dangerous is altering your risk management approach — for example, removing a stop loss to avoid taking a loss.
- Income can be inconsistent: It is not easy to consistently make profits every month. Even the most experienced traders do have some losing months. So, what happens in those months that you inevitably do not make money or even end with a loss? That is why you must learn to reserve a portion of the profits in those months you made money to prepare for the rainy day.
- It can be tough when there is no other source of income: One thing about trading is that it is easy to lose money in the market when you are desperately in need of cash. In that situation, you can easily make trading errors, such as not closing a losing trade, jumping the guns, or chasing trades that you missed.
How much can you really make from day trading?
Perhaps, the major reason why many people look to start day trading is the profit potential. In fact, one of the most common questions we get is, “How much money can I make day trading?”
Well, it is not an easy question to answer. How much you make depends on a number of factors, including the trading strategies that you use and how well you implement them. Now, let’s take a look at those factors before we attempt to arrive at the potential returns. Those factors include:
- The quality of your trading strategy
- Your ability to execute the strategy according to the rules
- Your position size
- Your trading capital
- The time and effort you put in
1. The quality and robustness of your trading strategy
All trading strategies are not equal — some are more profitable than others. You need a strategy that has a history of delivering profits. In other words, it must have been tested and proven to have an edge in the market. Your strategy should also have smaller drawdowns so that you can trade with reasonable position size.
Additionally, the robustness of the strategy matters a lot. Some new traders believe that trading strategies continue to work well forever, but that is not the case as every strategy eventually fails and needs to be replaced. However, a robust strategy is more likely to work for a longer time since it can perform in a not-so-ideal market situation.
Many factors determine whether a trading strategy is robust or not, but here, we will focus on the two common determinants:
- How long the strategy has been profitable: By how long the strategy has been profitable, we don’t mean how far back any historical observation stretches, but how long the strategy has delivered profits in a real or demo trading account. While everyone can come up with something that looks fantastic with hindsight, not that many know how to build a day trading strategy that can last into the future, which is a completely different thing. A robust strategy should be able to last for a long time in the real-market environment.
- How many conditions it uses: If a strategy uses more than a couple of filters and conditions the chances are that it won’t be as robust as a strategy that uses much fewer conditions. The reason is that the more conditions and filters you introduce in a trading strategy, the higher the chances of curve fitting.
In summary, to live off day trading, you need a profitable and robust strategy to be able to make reasonable returns that can take care of your living expenses. It is even necessary to have different strategies for different market conditions because one strategy cannot work in all market conditions.
2. Your ability to execute your strategy according to the rules
Once you have a winning strategy, you have to stick to the rules. Many people can’t stand the emotional turmoil of following a strategy in its ups and downs. Sooner or later, they will start to make haphazard (and emotional) buy and sell decisions as they attempt to make back previous losses. This is a recipe for disaster since the edge lies in properly executing the trading strategy and not in random decisions!
3. Your position size
All things being equal, it is logical to expect a bigger position size to make more money, but it is not always that way because when the inevitable losing streak comes, the bigger position size causes a larger drawdown and may even wipe out the entire trading account. For this reason, it is generally recommended to risk no more than 1-3% of your trading capital on each trade so as to keep the risk of ruin at an acceptable level.
4. Your trading capital
The size of your trading capital matters a lot. The bigger your trading capital is, the higher your position size will be while maintaining the acceptable 1-3% risk. For example, if a stock sells at $10 per share, someone with a $10,000 trading capital can only buy 10-30 shares of that stock per trade, which represents a risk of 1-3% of the account size ($100 – $300). However, someone with a $100,000 account can buy 100-300 shares of that stock while risking the same 1-3% of the account size ($1,000 – $3,000).
5. The time and effort you put in
You cannot succeed in day trading without putting in the time and effort that’s required. If you are not always available to take the trades signaled by your strategy, you won’t be able to get the best out of your strategy. In fact, those trades you missed could be the successful ones while the ones you took could be mostly losers. So, if your strategy is manually executed, you have to be always present to execute the trades. What usually happens is that, in the long run, the market tends to favor those that work the hardest, provided that they work on the right things.
So, how much can you really make from day trading?
From our discussion so far, you can see that the returns you get from day trading can vary a lot. But one thing we know is that it is unrealistic to expect all those 10-20% profit per month or over 100% per annum that you see on the internet. They are only trying to market their product or facilitate a scam.
We think that any return in the region of 30-60% annually or 3-5% monthly is a great one. That way, you’ll be doubling your money every two to three years if you aren’t taking out the profit. But since you want to live off your monthly returns, you will be taking a portion or all of that profit each month. To live off a 3-5% monthly return, it means that your trading capital has to be big enough.
What you can do to live off day trading
You can indeed live off day trading, but you must put the necessary things in place. Here are the things you must get right:
You can’t be profitable in day trading without first learning how to day-trade. Getting the right day trading education is the key to achieving what you want to do — to stay anywhere you want and make enough money that can take care of your living expenses. While you can teach yourself how to trade using free resources you can find online, it will take you several years, and you may not even learn the important things. The easier part is to enroll in a good day trading course where you can learn what you need to know in a few months.
Another factor that can determine your success is planning. You have to plan everything: from how much you need to start to how much of your profit you have to withdraw for your upkeep and the portion to leave behind for your account growth.
Of course, you will need a sizeable capital to start day trading for a living. If we assume that you will be making a 5% profit monthly on average, then you may need to start with $50,000 – $100,000 capital. This will give you a $2,500 – $5,000 return per month on average. So, you have to start saving even before you start learning to day-trade.
The drawbacks of day trading for a living
Some of the drawbacks of day trading for a living include:
Your income will be inconsistent: Your income will fluctuate by a lot — you might make $5,000 in one month and only manage $1,200 the next. Moreover, if you take the day off work, you won’t get paid a penny.
You will have a solitary lifestyle: Day trading will force you to live a solitary lifestyle if you don’t find a way around it.
There will be no career progression: You won’t have any career progression and may find it challenging to get back into the business world.