Robinhood Day Trading Rules: Everything You Need To Know
Robinhood is a popular trading platform that caters to investors who may be new to the stock market, or who are looking to make money day trading — that is, buying and selling the same position quickly, often the same day, in order to make a quick return on a volatile stock.
Robinhood and Meme Stocks
Early in 2021, a group of retail investors connected on Reddit and joined forces to bid up the price of GameStop, a video game retailer and a few other stocks that were on a downward trend. The price of these stocks rose rapidly, and some people made lots of money. Of course, other people lost lots of money, and trading was so frenzied that it needed to be stopped on some positions. This caused the stocks to plunge.
Many of the traders, who were new to the trading game, used Robinhood to make their trades, thus linking the trading platform to what has become known as the meme stock phenomenon.
Day Trading on Robinhood
While Robinhood may have been caught off guard by GameStop and other meme stocks at the time, it remains a popular platform for day traders. The reasons are simple.
The platform is very easy to use. You can trade on your mobile phone, and you can access real-time research and analytics.
You can trade stocks, ETFs, options and cryptocurrency. You can also use margin, a way to leverage your balance to purchase more positions, potentially making more money.
Robinhood offers zero-commission stock, ETF and crypto trades. Since day trading often relies on very small changes in the stock price, commissions and fees can quickly eat into your profits. Trading with no commission charge preserves your profit.
Robinhood Account Types
Robinhood offers three different types of accounts. It’s important to understand which one is right for you, and that depends on how — and how much — you trade.
Robinhood Instant is the basic account that you’ll get when you first sign up. You can access your deposit instantly, up to $1,000 and you can trade during extended hours. You can also trade with funds from sales that have not yet settled. You’ll need to be approved for options trading. There is no charge for an Instant account.
Robinhood Gold offers additional features, like margin investing and larger instant deposits. If you are approved, you can access margin investing, so you can borrow funds to invest with. You have access to advanced market research and Level II Data. The cost for a Gold account is $5 per month.
Robinhood Cash limits your instant deposit access to the first $1,000. You cannot trade with funds that have not yet settled from securities that you’ve sold. You can downgrade your Instant or Gold account to a Cash account at any time.
There are some restrictions on how, and how much, you can day trade on Robinhood. Here’s what you need to know.
Pattern Day Trading
Traders who execute four or more day trades within a five-day period, representing more than 6% of your total trades in that five-day period, are considered pattern day traders by FINRA. A day trade is defined as buying and selling the same stock or opening and closing the same option position in the same day, so positions held overnight don’t count.
Robinhood will flag you as a pattern day trader unless you have a portfolio of at least $25,000 in your Instant or Gold account as of the end of the previous trading day. This portfolio value does not include cryptocurrency. Traders with a cash account are not affected since this account does not allow for margin trades. If you trade outside of these restrictions, your account will be restricted from purchasing for 90 days.
Why Does Robinhood Limit Day Trading?
Note that these pattern day trading restrictions are not unique to Robinhood. They are FINRA requirements, and every brokerage enforces them. Robinhood does offer a Day Trade Counter in the app to help keep you from going over the limit of day trades. Plus, you can set up your app to alert you when you’re about to place your fourth day trade of the day.
Orders are considered placed when they are executed, so open orders don’t count as trades for the day trade limit. Once executed, they will count. The Robinhood Day Trade Counter counts open orders because they will be considered orders once they execute.
If you place a very large order, or an order in a stock that typically trades at low volume, your order might be executed in multiple parts. Each of these executions counts as a trade for the purposed of the Pattern Day Trading rule, so be sure to keep a close eye on these types of trades.
Day Trade Calls
There is a limit to the amount you can trade each day, and you need to know what that limit is to avoid a day trade call. Here’s what you need to know.
Your day trade limit can be found on the app. Go to the Account tab in the lower right corner, then to the Margin Investing section, and look for “Today’s Day Trade Limit.” It can change from one day to the next, but it won’t change during the day. In other words, the day trade limit you have first thing in the morning will remain for the rest of the day.
The formula for calculating your day trade limit is based on the amount of cash in your account and the maintenance requirements on the stock positions you hold overnight. If you have more cash than stocks in your account, or if the stocks you hold have low maintenance requirements, your day trade limit will be higher than it would be otherwise.
If you want to increase your day trade limit, you will have to deposit funds. Selling stock does not increase your day trade limit that day.
If you have been flagged as a pattern day trader within the last 90 days, and you exceed your day trade limit, you will get a day trade call. You’ll be notified of this by email. You need to resolve the call within five trading days, and you can’t trade until it’s resolved. If you don’t resolve it within five trading days, you will be restricted from trading for 90 calendar days.
To resolve a day trade call, you will need to deposit funds into your account. The amount you need to deposit to resolve the day trade call will be indicated in the email and in the account menu on your app. Once you have resolved the day trade call, you can begin trading again on the next trading day.
Understanding the rules for day trading on Robinhood will help you keep your account in good standing, and make sure you’re ready to trade when that next buying opportunity comes along.
Editorial Note: This content is not provided by Robinhood. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by Robinhood.
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- The New York Times. 2022. "Robinhood faces lingering issues a year after meme-stock mania.."
