First, let’s understand what is pattern day trader and whether the profession is something that you can go through with. According to the day trader rule, pattern day traders must execute at least 4 short-term “day” trades in 5 days.
Let’s take a closer look at the day trader rule cash account and the factors affecting profitability first before estimating the average income of a full time day trader.
What Factors Affect a Day Trader’s Potential Earnings?
Not all traders are the same. The day trader pattern rule separates day traders, who benefit from short-term fluctuations (ideally those that happen within the span of 24 hours) from others. Day trader patterns are different in that the span of time for every trade, i.e., when you buy and then sell or sell and then buy a security, is much shorter.
Most people who jump into the game often worry about things like “How hard is it to be a day trader?” Although it’s not the simplest of things, if you stick with expert day trader tips, you can pull through and make profitable trades consistently.
A day trader’s potential earnings are affected by the following:
- Your starting capital amount
- The strategies you employed
- Markets where you trade the most
- Sheer dumb luck
But first, you need to know how to become a pattern day trader.
FINRA dictates that a day trader is someone who executes at least 4 day trades per 5 days. These day trades should also reflect at least 6% of the trader’s total trade pool. Thus, according to the day trader pattern rule, you don’t have to be engaged exclusively in “day trading” to be classified as such.
So, why is there a pattern day trader rule? Well, the short answer: it’s a regulation to keep the market in order. That pretty much wraps up pattern day trader requirements, let’s move on to the money involved!
How to Set Realistic Income Goals as a Day Trader
Don’t let a winning trade turn into a losing one. You’ll come across advice like this all over the internet, but what does it mean? Well, you see, if you test your luck, you’ll end up losing money rather than turning around a profit.
Setting realistic, achievable goals is thus step one in making profitable trades. Don’t wait around when you can exit a trade and make a profit — do it; you’ll regret delaying an exit later.
Instead of aiming to earn ridiculously high profits every trade, look for small but consistent profits instead. Using an effective day trader scanner and an optimized day trader monitor setup (avoid day trading on the phone if you can), you can spot profitable opportunities with ease.
Normally, if you can make 1-2% of your capital daily, you’re golden!
Now that you know the answers to “What do I need to be a day trader” and “What does it mean to be a day trader,” let’s move on and understand the tax implications that come with it.
Understanding the Tax Implications of Day Trading Profits
Who likes to talk about taxes, huh? But whenever money is involved, the government can’t hold back from taking its cut. Well, can’t complain — we do get all the services and amenities that come with this tax obligation.
Pattern day trader options also have to consider tax payments as a factor. If you understand “what is pattern day trader rule,” you’ll figure out that your trade qualifies as a short-term capital gain.
Essentially, you’re buying an asset, and then selling it within the year (in this case, within minutes or hours) for a profit. This means that you’ll have to pay 10% — 37% (usually 28%) in short-term capital gains tax on any profits you make.
Couple this up with the pattern day trader rule cash account obligations, and you’ll see that day trading is not cheap to get into (or to stay into). However, if you maintain a decent streak of profits, you can make it a full-time career!
Tips for Consistently Making Money as a Day Trader
A pattern day trader has to consistently throw in their A-game and walk away with decent (but realistic) profits. Every famous day trader will say something to this effect to help you bag consistent and juicy profits:
- Always be on top of all the latest news and events affecting your trade
- Have funds on the side (other than your cash account pattern day trader balance)
- Dedicate time (not just a couple of minutes) to both learn to become a day trader and to execute profitable strategies
- Don’t go all out, instead, take small steps
- Penny stocks are a no-no
- Don’t spend all day in front of the screen, pace yourself
- Use limit orders to cut any losses
- Always keep realistic, achievable goals for your profits
Strategy and Risk Management in Maximizing Trading Profit
Knowing how much can a day trader make should never force you to throw everything into a trade. Even if you start off small and only make minimal profits, the learning experience is worth it. Have a set of tools and strategies that are simple and repeatble. Check out our Day Trading Bundles of Trading Indicators to help you HERE
Experienced day traders can make as much as $154,000 per year, but know that you won’t get there overnight. Make sure that weigh the risks beforehand and stay true to your strategy. When you see a profitable exit, take it, no questions asked.
Focus on making multiple small profits as opposed to a single big one (which may never come).
And with this, you’ll learn to ace the game soon enough!
Maybe you’re not sure why pattern day trader rule exists and don’t want to be classified as one. You can learn how to get around pattern day trader rule and adopt another approach. In any case, trading is a potentially profitable full-time career if you do things right.
We hope this helps!