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Can Day Trading be profitable for retail?

  #70 (permalink)

North Carolina
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
Favorite Futures: es
Posts: 644 since Nov 2011

I thought I'd give my best definitive answer. The definitive answer is yes. Day trading can be profitable for retail but it is not profitable for most retail and even among the better retail traders, it is not profitable enough to make a living on a tiny account. Second, the question as asked cannot be answered because it isn't defined well enough. How profitable? How consistent? If that is an open ended, consistent forever then that's unanswerable but unlikely for all traders. You need to ask also what is the distribution of returns?

Based on my years of studying the market, my own hypothetical and published tracked performance and others I've seen, I will try to give you the most accurate answer possible. The best futures day traders (probably applies to other day traders) can make between 50% and 200% on an account basis while keeping drawdowns to under 50% and often under 30%. As for consistency/longevity, this type of performance is possible to do over at least multiple years, we'll say 2-5. Doing anything in trading consistently beyond that is a big question mark.

There is really no reason to even discuss or argue whether or not day traders can do this. I mean that if you are a top 15% day trader you should be able to do this. Most traders cannot afford to day trade for 50% or even 100% returns. So, it is very difficult to go full time. But, there is really no reason to discuss whether or not these returns are possible because it is easy to find such published track records. There are even programmed systems with returns like these.

The more interesting question is if you want to move yourself beyond a top 15% performer, what type of returns might be possible and how would you do it? How do you move into top 2% to 5%? This is where we do not have a lot of data as most traders in this group are unwilling to share their returns. But, if it is possible, I will show you how and where the risk comes from.

1. Risk a large percentage of account per day. If you are very consistent then you can risk a high % of your account each day and still keep risk of ruin to something marginal. For example, if you make at least several high probability trades per day then having a run of 12 losing days would be very unlikely even over 5 years or so (<5%). Given that sort of knowledge, you can determine an amount to risk per day... For example assuming you have a 55% of being profitable on the day, out of ~240 days (i.e. proxy for trading year), the probability of having a run of 12 losing days is less then 1%.

Now given this, it means you can risk up to 8% of your account each day. That would be 4 trades at 2% risk each, for example. So, let's see how that looks on a 25k account. It gives you a $2,000 daily loss limit. Assuming you can make 25% of your risk on average, that yields $500 per day. A theoretical return of $120,000 or a 4.8x return. This becomes more difficult to do on accounts sub 25k because the risk per trade drops such that you have to effectively hyper scalp. The risk is you start on a bad day or have a bad run to start with.

2. Trade multiple contracts on high probability trades. If you can find 1 trade that you make $50 per day trading 1 contract at high probability, then adding 10 contracts takes that to $500. The risk is that your stop loss is blown and that your win ratio drops.

3. Trade for bigger winners. If you can catch a big trade then you could pull off $2,000 or $3,000 or $4,000 on a single contract. The risk is that (1) holding open a big winner like that will put a large percentage of the account at risk-- it is a form of compounding, (2) catching big winners is very subject to volatility. This sort of trader might not be a strict day trader but might still be mostly day trading.

Also, as an aside, I suspect it is not always a skills gap in a lot of cases as to why retailers lose, it is because they are effectively setting themselves up to lose because they trade tiny accounts which makes the average trade a bigger percentage due to fixed futures contract.

Last edited by tpredictor; February 14th, 2018 at 05:33 PM.
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