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Passive income

Written By

James Barra

Written By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

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Edited By

Jemma Grist

Edited By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

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Fact Checked By

William Berg

Fact Checked By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

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Updated

Jul 24, 2024

Making passive income by day trading online in 2024 may sound like the dream. However, can it also become reality? To answer that question, the differences between active and passive income will first be explored. Then we will take a look at how to generate passive income through different trading techniques, including from stocks, cryptocurrency, forex, and more.

What Is Passive Income?

Passive income is regularly generated money that requires minimal effort on the part of the recipient to earn and maintain it. Gains on stocks, interest, commodities, lottery winnings and capital gains are often the types of earnings that come to mind.

However, whilst the above fits the popular definition of passive income, some countries also impose a more technical definition for the purpose of taxation. Nuances around such tax determinations will be detailed further below.

Active Vs Passive Trading

Active Trading

People often ask whether stock trading is passive income. However, the answer will depend on your individual approach. Active traders will invest a considerable amount of time and effort into turning a profit. In fact, their trade activity will often be their primary focus.

Passive Trading

Whereas, if you’re looking to generate a passive income from day trading, you probably don’t intend to spend all day at your computer monitoring the markets and making trades. Unlike active traders, your passive income will fit around your lifestyle, rather than dictate it.

So, if you want to generate passive income from options or bitcoin trading, for example, you may want to hand over your capital to a trusted broker, automated system or invest via copy trading.

Pros & Cons of Passive Income

Before we look at some techniques and tips to earning passive income day trading, it’s important you understand both the benefits and drawbacks. The limited amount of time you will need to commit is an obvious benefit. However, this also means that there is increased pressure on the investment decisions you do make.

In addition, passive trading can sometimes result in a slower stream of profit when compared to active trading. There is also a danger that you will neglect monitoring your passive income. This can result in losing out on potential profits. Alternatively, you may spend so much time worrying about your positions, that you excessively interfere, limiting returns.

How To Generate Passive Income

Automation

To make day trading passive income easy, some turn to automation. Used correctly, automated systems may enable you to generate substantial profits. This is because there is only a certain number of trades you can manually make each day. Whereas a sophisticated algorithm can automatically enter and exit positions as soon as pre-determined criteria have been met.

They also enable you to trade in a number of markets at once. In fact, once you have programmed in your criteria, you can generate passive income whilst you are sleeping.

Some may understandably doubt the efficacy of these systems. However, approximately 75% of all trades made on the New York stock exchange and the NASDAQ now originate from these algorithms, demonstrating their capabilities.

Software

Before you can start developing a passive income through automated stocks trading, for example, you will need to find the right software. Do your research and check reviews before you invest in any. In fact, for guidance and examples, see our software page.

Once you have decided on a software, you will need to develop an effective strategy. Creating a checklist of your day trading parameters is often a good place to start. You may want to consider the following:

• When to enter and exit positions
• Position size
• Intraday trading timeframe
• Targets and stop-losses

Algorithm

Once you have developed a strategy, you will need to have the algorithm written. If you have some technical knowledge you may be able to input instructions yourself, as the code is relatively simple. However, if not, you may want to consider hiring a programmer to assist you.

Back-Testing

Before you can use an automated system to generate a passive income with bitcoin, for example, you will also need to backtest your strategy. This allows you test your system before you risk any capital. You simply run your software against historical price data to get a gauge for how well it performs. You can then identify and remedy any issues.

The Monte Carlo simulation is a useful tool to try. This repeatedly tests steps of your algorithm and inputs random data into your parameters. This will allow you to forecast how well your new system is going to perform.

Application

With the hard work hopefully done, you can now enjoy watching that passive income build up in your account. However, you will need to routinely check your software is performing as expected. Technical glitches and anomalies can occur.

Copy Trading

Arguably, another way for trading passive income to be made easy is through copy trading. Rather than devoting considerable time and energy into developing a strategy and monitoring the markets, you can benefit from the success of experienced traders.

You simply choose a trader and then a programme will mimic that trader’s buying and selling with your capital. However, often you will find the traders and the website will take a small percentage of your profit. In fact, those who imitate traders can also then be copied and earn commissions.

Drawbacks

You may be thinking this is the ideal way to start forex trading as passive income. However, whether it’s stocks, futures or forex, there remain certain drawbacks to consider:

• Risking capital – You must be prepared that due to the volatility of markets, you could lose all the capital you initially invested. If you’re particularly risk-averse, seeing large losses for a couple of days may even stop you sleeping.
• Choosing a trader – Picking a trader is no straightforward challenge. For example, an aggressive crypto trader may clear you out in several days. So, consider their instrument of choice and approach. Also, check their recent trade history. You want steady and consistent results. It is worth noting, however, some individuals actually find several experienced traders to copy.
• Not Following Trades Proportionally – Some sites may not allow you to trade proportionally. However, for good, if not clear reasons, traders often invest specific quantities. So, make sure you really stick to copying your trader.
• Learning tool vs guaranteed money generator – Many argue trade copying is best used as a tool by beginners to learn about different markets and instruments. So, bear in mind it may not be the best means to generate a passive income day trading.

Overall, for those interested in day trading for passive income, you may want to consider both methods above. Each could significantly reduce the amount of time you have to spend intraday trading. However, it’s also worth highlighting they come with drawbacks and risks. Therefore, the challenge is deciding which will suit your individual needs and lifestyle.

Passive Income & Taxes

Before you decide day trading is the right way for you to generate a passive income, there are certain rules and regulations worth considering. Some tax systems split earning types into three distinct categories:

• Passive – Often considered net rental income and income from a business in which the taxpayer does not materially participate. It can also include self-charged interest. This definition encompasses a broad range of activities. To fall into this bracket you must not be too involved in your intraday trade activities.
• Portfolio – Capital gains from securities and commodities trading, such as stocks, currencies, gold, ETFs, etc, is normally considered portfolio income. However, it may or may not also be considered passive income.
• Active – As the name suggests, you must be continuously and substantially involved with the business activity. If you were to spend most of your day engaged in intraday trading, for example, you would fall into this category.

These definitions vary to some extent as you move between different tax jurisdictions. The point, however, is that it is wise to check what type of trade activity will constitute passive income where you live, plus whether there any particular tax regulations you need to be aware of.

Many countries consider passive income taxable as with non-passive income. However, it can also be treated differently. For example, in the US, the IRS allows passive losses to be written off only against passive gains. So, when losses exceed the income from passive day trading activities, the rest of the loss can be carried forward to the next tax year, as long as there is some passive income to write it off against.

For further guidance on how taxes may affect your day trading profits, see our taxes page.

Final Word

Of course passive income is something most people would like. Who wouldn’t like the idea of making money whilst you are out having a good time? Yet traditionally day trading has been considered an active, time-consuming means of generating profits.

Fortunately, modern technology now allows individuals to some extent, to take a back seat and still potentially produce a profit. However, you must find a system that suits your individual circumstances, while also considering the risks and any tax rules.

Further Reading

Books

• “Passive Income and Day Trading” – Ken McLinton, 2016