Myth 2: Day Traders Succeed by Gaining
Huge Percentages on Trades
The two secrets behind successful day
trading are leveraging and the magic of compounding. The most
successful long-term day traders typically aim for only a 1% gain on
their trades. Even traders who claim to make $1,000 in one day are
trading thousands of shares with roughly $100,000. However, because
of compounding, a 1% gain per week translates into 68% gain per year,
which is well above the 10% goal of most stock market investors.
Traders with an account balance of
$25,000 can realistically make $60,000 yearly in profits. How?
Because $25,000 has the buying power of four times the account value,
which is $100,000. So that 1% gain of $1,000 is actually a 4% gain on
the account value of $25,000 which translates into a 340% increase per
year. This is the power of leveraging.
Here's the Math:
While there are 52 weeks in a year,
imagine multiplying your money by 1.01 x 1.01 x 1.01 (52 times). This
would be 1.01 to the 52 power or 1.01^52 = 1.678 (68%).
$100,000 x 1.678 = 167,800 or over a
However, if the account balance was
actually $25,000 to begin with then that's $85,000/$25,000 = 3.4 or
Day traders who claim they only trade
breakouts and huge price spikes are fooling everyone by making it
seem impossible to be successful unless you have their training.
Guess what? They are making money off of people enrolling in their
training program, rather than day trading. Then, when these students
fail, they assume they are the exception.
In reality, anyone can be successful by
aiming for a low percentage on a volatile stock. Rather than looking
for that special signal or unique moment, day trading only requires
that you get in the trade while the trend is up, get your 1% profit,
and get out of the trade.
If you are trading with $2,500 cash,
but you are using your full buying power of four times your account
value ($2,500 x 4 = $10,000), then you are making $100 from that 1%
gain which is actually a 4% gain on your $2,500. If you are trading
with $10,000 cash and are using your buying power of four times your
account value then you can make $400 from that 1% gain.