Is day trading still profitable in 2020?

Today I asked someone, who has been trading the stock markets for years if day trading is still profitable for a newbie trader in 2020. He told me that day trading is dead for human beings and automated trading is taking over and I should not waste my time with it.

What makes this person the authority on the future of trading? Perhaps he's projecting his own failings as a trader? In addition, automated trading is not taking over and ruling the market. And high frequency trading is responsible for a significant amount of daily volume but that's not displacing traders. There's money to be made every day in a plethora of ways.

Day trading is and will always be profitable for those that have the education and experience. But let's be realistic. In order to live off of it, you need to be heavily capitalized and be able to not only withstand losing years but to be able to withstand withdrawing post tax dollars every year for living expenses. I'd offer that those who have spent a career in the investment sector (brokers, market makers, floor traders, etc.) would be among the few who could readily do this - not the Average Joe.

OTOH, it is reasonable to expect that once you have sufficient assets and years of experience, you can augment your income with some day or swing trading. In most years, you're not going to beat the market, let alone come close matching it. But that's not the goal.

Keep your day job, save and invest. Take care of your future. At the same time, become financially literate. At some point down the road, take an amount of money that you can afford to lose and focus on disciplined risk management. AI isn't your enemy. You are. See if you can trade for a year and not lose it. Achieve that and you could quite possibly be on the way to earning some supplemental income.

In order to be a successful trader you need to have great research skills. Can you read cash flow statements and other financial statements? Do you know how to look out for all the warning signs on these statements? How to calculate financial ratios? You need to thoroughly understand the companies you're picking so you can try to time when to buy and sell stocks.

Read a lot of blogs and web articles written by research and equity analysts. Everyone has their own style, so read widely and follow analysts who have a strategy that resonates with you. Note down their predictions and see if they're right months later (no one is right all the time, but you might not want to learn off an analyst who is wrong all the time either).

Just remember that you're up against some large firms who have all the latest tech and employees with fancy masters degrees. Even some of the really big firms with all the bells and whistles have fallen spectacularly. It's a risky game.

Investors who profit from trading second-by-second or even minute-by-minute are likely market-makers who buy at the Bid and sell at the Ask. Mostly this is just order filling and response to Depth-of-Market.

Investors who trade longer time periods, within the day, often look for certain points to be made or not made in press releases. Also, they follow correlations. Of course there is trading by technical analysis. And there are news surprises.

Currency traders, for instance, follow calendars and press releases of scheduled economic reports. And there are correlations to stock markets, to commodities, and to country specific news. Of course there is trading by technical analysis of order flow.

Well, this is a difficult question. Any sort of trading can be profitable, heck flipping a coin with good risk management can be profitable.

Key Word: Can

If you want to know if day trading is still worth it, I would say it is, but only if you find a system that works for you.

One key point that your friend might be missing is that day trading high volume is nearly never profitable, but trading small amounts of shares can definitely still be profitable.

“The success rate for day traders is estimated to be around only 10%, so … 90% are losing money.” Cory Michael at Vantage Point Trading is even more pessimistic (or realistic) when he says, “Only 1% of [day] traders really make money.”

From Forbes (July 16, 2017).

An average 10% annual return on investment over the course of several years would be doing very well for day trading, which has to justify both large brokerage fees that accumulate on a per transaction basis, and an immense amount of time involved by someone who, to be successful, really needs to work more than 40 hours a week (trading during hours when the market is open and researching when it is not) and to have a skill set sufficient to obtain employment at $50,000-$70,000 a year or so, in a financial, economics, or management career.

So, if you have $500,000-$700,000 to invest, work 50-60 hours a week, and are extremely knowledgable and skilled, you might break even relative to the straight job. Except that pretty much anyone can passively invest and generate 4-5% per year to live on without depleting principal in the long run, which someone working a straight job could do.

So, you really need something like $1,000,000 to $1,400,000 to invest, working 50-60 hours a week, with a very high level of knowledge and skill that could get you a job paying $50,000-$70,000 in a private sector salaried job to even consider it, and even then, the risk involved in day trading is profoundly greater than the risk involved in a salaried finance job, so you really need to have more than that to invest to make it worthwhile.

If you are an MBA who used to work in a brokerage or investment bank with several million to invest and you are willing to work long hours with some funds devoted to research assistants, day trading can make sense for you. But even then, there are lots of other finance strategies, like being an angel investor or starting your own business (ideally together with other investors), that are much more likely to bring much larger returns.

If not, some people will be successful through dumb luck, but you are more likely to get ahead counting cards at blackjack in a casino or buying lottery tickets, than you are to make money in day trading. It can happen, but it very rarely does.

Most day traders don't have nearly that much money to invest, and not nearly that much expertise, which is why they overwhelmingly fail.