Today, you’ll learn why are day traders not millionaires.
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. I always related profitability to the knowledge the trader has.
- Super Traders Annual Average Returns are only about 10%-20%
- Low Success Rate
- It is like a job
- Commissions and costs
- Leverage Low Capital
Knowledge is power with 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 specialize 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.
Day trading millionaires are only a few of a kind because they are rare due to lack of capital, and the statistics have shown that only one percent can make it a millionaire. Only one percent make it because day trading looks like a job, and a job rarely makes a lot of money more than a business does.
Are day traders successful?
Few day traders are successful while most of them failed. They failed because they are competing against each other, and most of them are too clever, which makes day trading even more difficult.
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 evaluation of returns should be on for a long time. (Except for Jim Simons: 39% after deducting fees. (source)
Time will tell whether a trader is actually profitable.
We measure not only profitability on a one or two-year period when trading stocks. The basis should always be in the long-term.
The term should be 10 years minimum. The minimum is important so that people are certain that day trading is actually profitable.
Average day trader return:
Being profitable around 20% per year is only 0.08% per day (20% /253 average trading days).
0.08% of the $25,000 (Typical retail trader) 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 and wall street hypes.
Online, those gurus may resemble a millionaire trader, trading penny stocks, yet at they are just selling courses.
Aspiring traders may become interested in day trading, yet in reality, it is one of the toughest job, which on the surface may seem easy.
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 a market 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 with no payment guarantee. Because there is no guarantee, 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 trades within the day.
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 an enormous 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 a market composed of people who are trying to earn money every day.
Every day, day traders need to compete, which can cause 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 charges such as fixed, floating, and tiered commissions. (source)
Fix commissions are more expensive than the tiered fees. Although tiered fees are deductions charged a per number of trades, they are 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. High Leverage Low Capital
Day traders often use high leverage because of low starting capital.
The capital is small or not enough, so they borrow from the broker to increase the trading sizes.
For example, a trade size of $20,000 may require $10,000 capital to trade with leverage.
Here, 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.
The trading capital and amount earned should at least justify the time and money spent with trading.
Over trading: A note to Pattern Day Trader
A pattern day trader is a trader who made four day trades in the rolling five trading days. (source)
Why is pattern day trading bad?
As a general rule, most brokers will stop a pattern day trader from executing more trades, unless the account balance does not drop below $25,000.
This limitation reduces the number of day trades allowed, which reduces the profit potential.
Also, some traders could not close their losing positions due to restrictions of some brokers.
Did you learn something about our post, why are day traders not millionaires? Please share it.