Today, you’ll learn why are day traders not millionaires.
- Super Traders Annual Average Returns are only about 10%-20%
- Low Success Rate
- It is like a job
- Commissions and costs
- Leverage Low Capital
Most day traders are not millionaires because they make money just like in a normal job. The job can be just an entry-level grade that pays lower than the minimum wage.
The pay is lower because the trader is not yet profitable. Profitability is always related to the knowledge the trader has.
Knowledge is power when it comes to being promoted in a job. The job as a day trader is so difficult that making money is rarely possible.
It is rarely possible because day traders are competing against other smart people.
Those people might have master’s degrees and they often specialized in math and finance.
Their specialization will beat most day traders in their own game.
Most day traders often got their training from someone on YouTube. On Youtube, there are so many gurus out there who appear to be profitable.
1. Super Traders Annual Average Returns are Only 10%-20%
The best traders have only an average annual rate of return of 10% to 20%. The returns are based on a long period of time. (Except for Jim Simons: 39% after deducting fees. (source)
Time will tell whether a trader is actually profitable.
Profitability is not measured on a one or two-year basis. The basis should always be in the long-term.
The term should be 10 years minimum. The minimum is required so that people are certain that day trading is actually profitable.
Being profitable around 20% per year is only 0.08% per day (20% /253 average trading days).
0.08% of the $25,000 account is equal to $20.
Can people live with $20 per day for a 20% annual return?
20% return is attainable only if one is an elite trader.
Now, you’re asking why day traders are not millionaires.
They are not millionaires because they do not have enough capital to day trade.
Day trading is really difficult because even the best traders in the world make only 0.08% per day.
The best traders cannot even make on average 1% percent daily, contrary to the claims of some YouTube gurus.
2. Low Success Rate
According to forbes.com, the success rate of day trading is only 10%. (source)
However, the rate is actually lower based on the previous article posted on this website.
It is lower because it is only about one percent.
Only one percent of all day traders make money in the stock market.
The stock market is designed to take money from the idiots.
Most idiots are day traders because most day traders do not know what they are doing.
They are trading the patterns in which they learn from their gurus.
They learn by buying courses online without testing it.
3. It Is Like A Job
Day trading is a job without any payment guarantee. It is not guaranteed because the profits depend upon the trading strategy.
The strategy can be profitable, yet traders have to show up every day in the stock market.
They have to watch the market from 9:30 am to 4:00 pm eastern time to work. (source)
The work is mostly about monitoring active stocks and looking for possible day trades.
While trading, day traders experience fear when the trade goes against them.
Because of the fear, they often let their losses run. The losses get bigger, and then they might lose their trading account.
Consecutive losses will affect their mindset and they will give up.
They will give up because they cannot follow their trading plan anymore.
Following the plans seems difficult when traders are down by 5% and above.
5% or more loss is a big loss for day traders because they need to earn to live.
Day traders need to avoid low probability trades to make money in the stock market.
But, the stock market is composed of people who are trying to earn money every day.
Every day, day traders need to compete with each other which can result in exhaustion.
The exhaustion can limit what the trader can earn for a day.
4. Commissions And Costs
There are three types of commissions day traders have to pay to make money.
The fees are fix, floating, and tiered commissions. (source)
Fix commissions are more expensive than the tiered fees. Although tiered fees are charged per number of trades it is still expensive.
It is expensive because if traders pay $3 for every 20 trades, they are still paying for the bid and ask spread.
The spread is the difference between the Bid and the Ask price.
When buying a stock, traders need to hit the Ask price.
The Ask price is the best price in the market for buyers which includes an added cost.
The extra cost is a charge from your broker for selling the security to you.
For example, in a volatile uptrend stock, buyers keep hitting the Ask prices to get into the stock. To get into the stock, bidders will also hit the Ask prices because their orders are not getting filled.
Getting filled in order is important for day traders to not miss out on the trade.
To avoid missing out, day traders have to pay fees to avoid being left out.
5. Leverage Low Capital
Day traders often use high leverage because of low starting capital.
The capital is low so they borrow from the broker to increase the trading sizes.
For example, a trade size of $20,000 can be traded with a $10,000 capital because of leverage.
In this case, the leverage is 2 times the trading account.
Since Reg T rules allow only two times margin, traders with less capital have only lesser income. (source)
For example, $20,000 trade size needs $10,000 account.