Why Day Traders Can Make Big Returns, But Aren’t Millionaires
In this article I look at why a lot of successful day traders aren’t filthy rich, what prevents them from being so and how day traders (or anyone) can increase their wealth/income. Whether you’re a day trader, want to be, or are just want to understand why your profits or income aren’t rising, there’s something in this article for you.
Day traders can make great returns…they have to if they hope to make a living from the markets. But if they make great returns, why don’t you hear of more millionaire or billionaire day traders?
Most day traders save up cash to fund their trading and therefore usually start with $30,000 to $40,000+ for day trading stocks, $2000+ for forex day trading and $3500+ for day trading futures. To see the potential for day trading each market, read How Much Money Can I Make As a Day Trader. Individual trader performance varies of course, but that article highlights that consistently making 10% or 20% (or more) a month is quite possible.
When people hear of day trading making 10% or 20%+ a month they typically raise the following questions/comments:
- Where are all the millionaire day traders then? On a $50,000 account, making 20% a month (and forget even higher returns!) you’re doubling your account every 4 or 5 months. Again, where are the day trading billionaires?
- Why aren’t these day traders managing other people money and making 100%+ year returns as a hedge fund manager? Top hedge funds make 20% or 30% a year, and often not consistently, so a day trader making 10%+ a month (120% per year) is insane…if they could really do it, why aren’t they managing other people’s money?!
- Why don’t I ever hear of someone making 120% per year, except when he/she is trying to sell me something like a book, subscription or trading course?
Let’s address these questions and concerns.
Few Day Trading Millionaires
First, there is an assumption that there aren’t many day trading millionaires because day trading isn’t really talked about on business television or on the news. Most day traders work from home and most have very low public profiles. You hear much more about investing/investors, not day trading/day traders. So just because a lot of people don’t know of them doesn’t mean they aren’t there.
That said, there aren’t many day trading millionaires compared to the total number of people that day trade. That’s a highly likely statement…there are very few millionaires in any field compared to how many people are involved in that field. In every field there’s a wide of array of incomes, and rarely (if ever) is there a large collection right at the top of the pay scale. Instead, incomes are spread out, from very low pay up to millions of dollars a year, with most participants clustered somewhere around the median. In other fields you can be very good at something and not be a millionaire, and so it is with trading.
Aside from the statistical improbability that all good traders can be millionaires, there are other more tangible reasons why even great day traders aren’t millionaires. These reasons include the “personal ceiling” and “market ceiling.”
Day Trader Personal Ceiling
In life most people find an income level they’re comfortable with and stay there. They may want more money, but do little work to actually make that a reality. This is called the personal ceiling.
It’s a resistance level which prevents us from progressing, without a significant shift in psychology, to the next stage in making more money. There is always another personal ceiling above us though, and eventually we hit one we can’t get through. Most people hit a personal ceiling at whatever the average income of the population is. Some hit it theirs sooner (based on opportunity, desires and skills), some hit it later. But eventually we all hit a point where making money becomes much more difficult, or not worth the hassle (even though we want it).
You can make more money, but the personal ceiling makes it difficult. Day trading is no different. One trader may decide (or get stuck at) a $2000 per month income is fine for their lifestyle. Another doesn’t quit till they make $50,000 a month, but then they can’t seem to make much more than that. Everywhere in life we hit limits where it takes extreme work to move further, and so it is with day trading. We reach a point where making a bit more money requires what seems like an exponential amount of work, and so we get stuck (unless we find a different way of doing things).
The personal ceiling is mostly psychological, but it is also just life. Sickness, relationships, deaths, vacations, natural disasters, personal disasters, babies, drama, emotions…there are loads of things that can divert us just when it seems like we’re getting on track. Does it always seem like you get sidetracked right before you think you’re going to have a breakthrough? That’s the personal ceiling taking on its many forms. To break through it means a lot of work and often personal sacrifice…and for what, more money? To some it’s worth breaking through, for others it isn’t.
Beliefs and values also contribute to the personal ceiling. Money has never been my motivator for trading, rather my motivator is freedom. So I trade for a few months, and then usually take a few months off. Money isn’t the only things day traders seek…they may only day trade so they have the time to pursue other passions. While some people come to trading for money, most of the day traders I know do it because they don’t want to spend 8 hours in an office and two hours commuting in traffic. Quality of life is more than making money–that’s my own belief of course, and contributes to my own personal ceiling in terms of money. In terms of freedom though, the ceiling has been smashed wide open. I tend to make as much money as is required to maintain that freedom, since that’s my motivator.
What’s the typical personal ceiling? Day traders I know typically make between $40,000 and $300,000 per year, working for themselves. Once you can make $40,000/year consistently there really isn’t a reason why you can’t make $60,000, or $100,000 or $200,000. And yet the fact remains, people find a spot they are comfortable at and typically stop there. To increase your income you’ll have to progress very slowly, marginally increasing position size. Try to jump income levels too quickly and your emotions are likely to get the best of you, leading to a backward slide. The personal ceiling is a conceptual, but a very real thing.
Day Trading Market Ceiling
There also a Day Trading Market Ceiling. A successful day trader (not an investor, though) will eventually get capped out, as the market simply can’t accommodate an infinitely increasing position size for a particular strategy. To make more the trader either needs to alter the strategy, or also trade something else…and this may or may not work. Change one thing and you can’t assume all else will stay the same.
To attain the returns discussed in the “How Much Day Traders Make,” multiple trades are made each day. Trades are likely only lasting a couple minutes. While multiple-millions of dollars worth of stocks, futures or currencies may change hands over the course of couple hours, day traders have precise entry points. Therefore, position size is limited to the amount of liquidity (volume) available at the exact moment a trader needs to get into and out of trades.
Investors, hedge funds and mutual funds can accumulate or dispose of positions over weeks, taking advantage of days or even weeks worth liquidity. Day traders don’t have that luxury. It doesn’t matter if a stock trades millions of shares a day; if there is only 100 shares available when they need to take the trade (based on the strategy) that’s all they get. That’s an extreme example, but at any given moment there isn’t infinite liquidity available–there is what there is, and that means there is a limit to how big of a position you can accumulate and dispose of when your strategy calls for it.
Based on personal experience, in day trading forex I wouldn’t be comfortable taking more than 5 standard lots on a day trade. Some may take more, most traders would take way less. Taking a larger amount would mean significantly increased risk of slippage or partial fills (you end up with the whole position on losing trades, but only partial positions on some winning trades). Possible gains attained by taking a larger position are offset by these negative factors. At 10:1 or 15:1 leverage a forex day trader–using a day trading forex strategy similar to mine— may cap out at around a $50,000 to $75,000 account (including leverage, that means trading close to $1million). Beyond that, they may find little additional gains, unless they alter their strategy, take longer term trades or stagger their entries and exits at various prices. Changing a strategy to accommodate a larger position isn’t a bad thing, but it takes additional research/practice time…and is it worth it? Only each individual can answer that for them self.
In the ES futures market I cap out at about 10 contracts, and that only requires a $40,000 to $75,000 account (maybe even less depending on how much you risk per trade). There is no reason to trade more in my opinion. Could you day trade more contracts? Sure, you could probably get away with 100 contracts some days/some trades…but why? It would take a long time to work up to carrying those sorts of positions, and even trading a few contracts can produce a good living.
The same goes for the stock market. Even in a very liquid stock or ETF like the SPDR S&P 500 (SPY) you will hit a limit on how much you can effectively trade on a short time frame. It may be a big limit, but you do hit it.
To see the minimum amount of capital you need to day trade, see How Much Do I Need to Become a Day Trader.
The bottom line is that you hit a limit on the amount of capital you can utilize effectively, and beyond that your percentage returns will likely decrease. For example, it’s much easier to make 10% a month on a $20,000 account than it is to make 10% a month on $20,000,000.
That means day trader tend to withdraw all proceeds over and above their “efficient capital limit.” So a $50,000 day trading forex accounts stays a $50,000 account and monthly profits are withdrawn and spent (like any other job) or allocated to something else. In other words the account doesn’t keep compounding indefinitely, the trader nor the market can withstand doing that…there are ceilings…psychological, natural (life) and structural (market).
Expanding Your Profit Potential
Unless day traders do something outside of day trading–such as investing some of the proceeds (fewer market ceilings with investing) or starting a business–they are unlikely to make the millions a year they are dreaming of. For most day traders making $500 to $3,000 is a good day….that seems to be the ceiling for most traders I know. Some days are higher and some days are lower. Factor in some losing days too and making $50,000 to $200,000 per year day trading is a more reasonable expectation..if you’re good. Save some of that and eventually having more than a million dollars in assets is a possibility…just like any job.
The one thing that is a big advantage with day trading is that it is possible to have huge days, weeks or months that bolster your income. While some jobs pay bonuses, it is pretty rare in the employment world to make $600/day on average and then all of a sudden have one day where you make $10,000 or $25,000. In trading that can happen, for example when the market has a massive move that is suited to your strategy perfectly. These events happen in day trading, maybe not very often, but when they do they provide a big opportunity to put away a nice big nest egg for a rainy day.
When I was younger I thought day trading was the only way to trade the markets…”Screw investing!” My views have changed as I’ve gotten older. Every day trader should invest, putting away for a rainy day and developing their trading skill set across longer time frames. Unlike day trading, investing is less capped. You can buy every share for days on end if you feel like it (assuming it suits your investment strategy)… hell, you can buy the whole company. Warren Buffett is a great example of that.
If you’re a day trader, in additional to day trading and investing some of your profits, also create another income stream. It doesn’t have to be trading related, but have another income stream. If you go to any wealth building seminar you will undoubtedly hear them say to develop multiple streams of income, and passive streams of income (like investing in stocks or real-estate, or collecting rent from your real-estate or dividends from the stocks you own). Quite possibly you started day trading to provide you with some extra income! That is great, but why stop there? As you generate more capital, look for places to put it where it can generate more money. The more income streams the better.
If you are looking for some investment strategies to produce another stream of income, here are some ideas:
- CAN SLIM Investing Strategy – Screening, Entry and Exit Methods: The CAN SLIM investing strategy seeks out growth stocks with solid fundamentals and strong price momentum.
- Top Trader’s Magic Formula Investing Strategy – The Magic Formula is an investing strategy designed by Joel Greenblatt, a professor and former hedge fund manager. According to Mr. Greenblatt, the strategy averaged returns of 30%/year (our research revealed a lower but still impressive number).
- How to Find Good Dividend Stocks to Invest In – Learn how to find good dividend stocks to invest in by quickly filtering through available dividend stocks for ones that offer a great yield as well as capital gains potential.
Day Traders and Trading Products
The more capital you have the harder it is to find places to put that capital to work. This is why large hedge funds typically have lower percentage returns than individual traders. It’s comparing apples to oranges.
Large funds can continue to take on more capital though because their trades are typically longer-term. Shorter term funds may accept additional funds by invite only. Day traders typically don’t trade for other people because once successful they don’t need to…there is no advantage.
If a day trader has a $50,000 forex account (and that is their “efficient capital limit”) and can make 20% a month, accepting more capital doesn’t do any good. Returns will likely drop and even if paid a percentage of the profits on the additional funds it may not pay off. If the day trader only wants to trade up to $50,000 (remember it’s leveraged), the only reason to accept outside capital is if they have less than $50,000 themselves. But it only pays to accept capital up to your “efficient limit.” For each trader and strategy this will be a bit different.
What about mirror trading (where other traders copy a pro trader’s trades)? Well, if I feel I’m maxing out the positions I can take (up to what I think the market can accommodate), why would I want hundreds of other people punching into the market at the exact same moment as me? Talk about slippage (for the people mirroring, not for me). It works for some strategies, not for others. And if I declare my day trades in advance, hundreds of people may step in just slightly ahead of my order, preventing me from getting in. For these reasons a pro trader may find that providing signals may not be worth the problems it causes. For some people it may be worth it…especially if they aren’t actually taking the trades themselves (they are just selling you a product but aren’t actually traders). So the seemingly simple “mirror” or “copy” trading networks that are popping up all over the place aren’t without major problems either. That said, mirror trading and providing trade signals works much better with investment strategies, because a few cents difference in execution (between the signal provider and the people who receive the signals) doesn’t matter on a long term trade.
If a day trader wants to make more money they either come up with more strategies (but then there is the issue of having the time and mental focus to implement them all…and we still face the ceilings) or they come up with a way to produce income outside of trading. If they love trading, this may involve writing books, selling courses, speaking at conferences or starting a website or chat room. In the real world developing multiple streams is part of personal finance 101.
Everyone should have multiple streams of income. Even if it is just investing in some dividends stocks. The secondary income doesn’t have to be trading related though; any source of secondary income is good assuming it’s efficient and you enjoy doing it.
Final Word On Day Trading Millionaires
Interestingly, day traders with the highest returns can’t utilize a lot of outside capital. There is both a personal limit that each person feels comfortable trading, and there is also a physical maximum that each day trading strategy and market will reach. On short-term trades, that limit isn’t that high. At a certain point taking a larger position size will actually start reducing returns. This is what we can call the efficient capital threshold/limit. Once a trader hits their limit it’s pretty common for those traders to offer their knowledge to others. Some are skeptical of this: “If you make so much day trading, why are you teaching others, and not sitting on a beach somewhere?” Well, I have done that. I have spent an entire year on the beach and was bored out of my mind. Sitting around doing nothing is not my idea of a fulfilling life. As humans we need to do something…at least the ambitious people. Teaching others a skill is just a method of creating multiple streams of income—a practice encouraged in most personal finance books you’ll read. Also, helping others has a lot of benefits…it adds a positive and personal element to an industry that is tough and solitary for most day traders.
If you want to day trade to make millions a year, you’ll likely be disappointed. Very few day traders, or even people in other professions, make millions a year. It takes more than just being great at something to become rich….and becoming great is a lot of work in and of itself. Generating wealth also requires a lot of personal discipline outside of day trading, such as not spending everything you make. If you want to really make a lot of money you’ll probably have to establish multiple streams of income and invest some of what you make.
If you just day trade you can become a millionaire over a number of years…but only if you save, don’t rack up debt, and invest some of your proceeds…just like people in normal jobs. And doing all those things isn’t easy either.