How Much Money Do You Need to Day Trade? Factors to Keep in Mind

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Day trading has never been easier, thanks to the proliferation of investing apps and zero-commission brokerage firms that all but encourage active trading.

However, if the Financial Industry Regulatory Authority, or FINRA, deems you to be a “pattern day trader,” the same rules apply whether you’re paying for every trade through a traditional broker or executing no-commission trades on your own via an investing app or online firm. Specifically, if you’re labeled as a day trader, you must have at least $25,000 equity in your account before you begin any day trading activities.

Opening and closing a position is considered one trade. To be categorized as a “day trade,” these opening and closing transactions have to occur on the same day to be counted. So, for example, if you buy Tesla in the morning at $188 and sell it in the afternoon at $195, that roundtrip trade is considered “one trade” for day trading purposes.

Under this definition, you can see how easy it might be to have your account labeled as a day trading account. If you buy and sell Tesla on Monday, buy and sell Amazon on Tuesday, buy and sell Microsoft on Wednesday and then buy and sell Tesla again on Thursday, you are considered a pattern day trader.

Day trading differs tremendously from long-term investing. Day traders are in and out of stocks in a matter of hours, minutes or even seconds in quest of a quick profit. Long-term investors hold their positions for years, even decades, trying to capture the perfect combination of long-term growth and compounding returns.

Minimum Requirements for Day Trading

The $25,000 Rule (Pattern Day Trader Rule)

It’s hard to observe a FINRA rule if you don’t know exactly who it applies to, or what exactly it means.

When you hear the term “pattern day trader,” you may think that it only applies to individuals or firms executing hundreds or even thousands of trades per day. The reality is that under FINRA’s quite broad rule, nearly anyone can be labeled a pattern day trader in today’s stock market environment.

Specifically, FINRA considers you a pattern day trader if you execute four or more day trades within five business days.

If you exceed three roundtrip trades in one day within a five-business-day window, your account will get hit with the “pattern day trading” label. This means that your account will be restricted until you meet the minimum equity requirement of $25,000 in cash and/or securities.

There’s an important caveat to the PTD rule, however. You can only be labeled a pattern day trader if you trade in a margin account. If you use a cash account, you can day trade as much as you want with no FINRA restrictions. Of course, it’s almost impossible to be a “true” day trader using a cash account, as you have to wait a day for trades to settle and you can’t purchase stocks in a cash account with unsettled funds. But it is technically possible if you keep large cash reserves.

Other Financial Requirements

Technically, there is no minimum trading balance required to be a day trader. But as it’s easy to fall into the category of being a pattern day trader, you should expect to deposit at least $25,000 into a margin account if you want to day trade frequently. Again, you can avoid this restriction in a cash account, but in that case, you’d have to deposit more funds anyway to be able to actively trade. Either way, you should expect to put up around $25,000 or more if you want to be a day trader.

Trading on margin allows for easier day trading but it also courts additional risk. Brokerage firms and the FINRA alike require investors to keep at least 50% initial margin and at least 25% “maintenance margin” on an ongoing basis, with some firms requiring 30% or more margin. If you make some bad stock trades and the equity in your account falls below this amount, you might face a margin call, requiring you to deposit additional funds immediately.

Factors That Affect How Much Money You Need

Trading Style and Strategy

While general guidelines are a good place to start, you’ll want to tailor your trading requirements to your personal style and strategy. For example, if you’re an extremely active day trader, buying and selling stocks tens or even hundreds of times per day, you’ll want to keep an extra-tight hold on the capital you are risking. If you’re willing to lose, for example, 5% of your capital on each trade, all it will take is 20 losing trades to completely wipe you out. If you’re an active trader, this could happen in a single day. Thus, you might want to limit your stop-loss in this scenario to 1% or even less.

You’ll also want to keep extra capital reserves on hand. The minimum day trading requirement of $25,000 could go fast if you’re actively trading and missing the market.

If you’re more of a passive day trader, or even a swing trader, you won’t need to keep as much capital on hand, simply because you aren’t making as many trades. You can also consider expanding your downside risk per trade to that 1% to 2% mark, as long as it fits in with your overall trading strategy and risk tolerance.

Broker Requirements and Fees

If you’re going to be a day trader, you most likely will be required to open a margin account. This requires a net worth of at least $2,000 and adherence to the rules and regulations set forth by the brokerage firm and FINRA. You’ll be charged interest on any margin balances at rates that can vary from firm to firm. If you fall below the required maintenance margin, you’ll face a margin call, requiring the immediate deposit of additional funds.

How Much You Can Start With

Starting with Less Than $25,000

It’s certainly allowable to begin day trading with less than $25,000. But you’ll likely have to restrict your day trades to a cash account. This means that you can only buy stocks with cash on deposit or with money that has already settled from a prior trade. For example, if you have $10,000 in your account, you can day trade $5,000 in stocks every day. During the first day, you will use $5,000 and have $5,000 remaining in cash to use on day 2. On day 2, you can day trade the remaining $5,000 in cash while the original $5,000 settles, becoming available for the following day.

Of course, with a smaller account, you can’t frequently day trade. If your first $5,000 trade goes higher and you want to buy more, you’ll end up using all of the capital in your account and won’t be able to make another trade until a day after you close your original position. This can add risk to an already risky strategy, as you won’t have additional capital to take advantage of opportunities you identify.

Leveraging Margin

Day trading on margin is a risky strategy. However, with high risk can come high reward. The primary reasons investors trade on margin are to take advantage of additional buying power and to magnify gains.

Imagine, for example, that you deposit $30,000 into a margin account. With an initial margin requirement of 50%, this means the firm will lend you an additional $15,000 to buy securities. Suddenly, your $30,000 is worth $45,000 in terms of buying power. This loaned money provides leverage that can amplify your returns. Let’s say you use all of that $45,000 to buy 1,000 shares of a $45 stock. If you sell that stock at $55, you’ll receive $55,000 in proceeds. After paying back the $15,000 margin loan, you’ll end up with $40,000 in your account. That amounts to a $10,000 profit on the $30,000 that you invested, for a return of 33%. But the stock itself only rose from $45 to $55, a gain of 22%. Leverage has enhanced your return by 50%.

Of course, leverage works both ways, which is why trading on margin is considered risky. If you flip the numbers above and the stock trades down to $35 from $45, you’ll end up with just $20,000 in your account after investing $30,000, a loss of 33% on a stock that only fell by 22%.

Capital Management and Risk Considerations

Managing Risk

As day trading is inherently a risky endeavor, it’s essential to have a risk management strategy. As day trading happens rapidly, losses can quickly spiral out of control unless you take precautions.

One of the most common protection strategies for day traders is to use stop-loss orders. A stop-loss order automatically executes at a certain price to limit a trader’s loss. If you buy Apple stock at $200 and want to limit your loss to 5%, for example, you could enter a stop-loss at $190. But an even better strategy is to enter a trailing stop-loss, in which your stop-loss rises along with a stock’s price. If the stock continues higher, you can ride the trend and increase your profits. But when the trend reverses, you’ll automatically be stopped out when the stock drops 5%.

According to the CME Group, traders should never risk more than 2% of their equity capital on any single trade. Other traders prefer to limit risk even more by utilizing no more than 1% of their capital on any given trade.

Setting Realistic Goals

Even if you’re a success at day trading, your profits won’t be unlimited — and even if you’re a good trader, you will always have some losses. That’s why it makes good investment sense to set both profit targets and loss limits. Day trading is about making small scores along the way on a repeated basis that eventually add up to big money over time. If you start reaching too far for profits, you might overstay your welcome and get caught when the trend reverses. Overall, most traders shoot for 1% to 4% per month as a profit target.

On the downside, you’ll always want to set a maximum loss so that you don’t waste your whole bankroll on a bad trade. Each trader is comfortable with their own level of loss, but generally traders don’t want to risk more than 1% to 2% of your total capital on each trade.

Something you’ll want to avoid as a day trader is getting caught up in emotional trading. Stick to your investment strategy, including your profit and loss rules, and don’t get caught up in news stories or market sentiment. Follow your charts and target prices and view the process as a business, not an emotional experiment.

How Much Money Do You Need to Day Trade Full-Time?

If you’re planning on day trading full-time, you should have substantial capital on hand. Even the best day traders go through periods where they consistently lose money, and if you run out of capital while you are still down, you’ll never turn a profit. Of course, it’s hard for any day traders, even professional ones, to make money on a consistent basis. But limiting your capital is attempting to do the impossible with one arm tied behind your back. If you intend to make day trading a career, you’ll likely need hundreds of thousands of dollars in your account to keep your capital reserves fresh.

As a full-time trader, you’ll also have to factor in your expenses. To boost your chances of success, you’ll need a high-powered computer and fiber optic connection that allows you to trade in milliseconds, not to mention various software, charting and trading packages that can facilitate your trading. All of these expenses must be factored into your capital reserves, on top of your actual trading money.

If day trading is just a part-time hobby for you, your capital needs will be much less. Stick to day trading amounts that you can afford to lose, and keep your “real money” invested for the long-term in a completely separate account so that you aren’t tempted to draw on it to fund any short-term trading losses.

Alternatives to Traditional Day Trading

Swing Trading

Swing trading can be a good way for newer traders to get the “feel” of day trading without taking on the work and stress load of actively day trading. Swing trading involves holding positions for days or even weeks, rather than a matter of hours or minutes. Investors can succeed at swing trading by following the current trend of a stock or the overall market, rather than trying to peg minute-to-minute movements. Whereas short-term stock price movements can be random, making day trading difficult, swing trading can be easier because trends tend to stay in place until they reverse. In a bull market, for example, a stock or index may fairly predictably rise over a few weeks or months, allowing swing traders to profit. But even in a bull market, prices on a shorter-term basis can bounce around randomly, creating difficulties for day traders.

One benefit swing trading holds over day trading is that there are no capital requirements or “pattern” labels. You can swing trade as long as you want in a cash or margin account without being required to deposit $25,000.

Paper Trading

Paper trading can be a good way to teach a novice investor whether or not they might have “the right stuff.” It’s also a way to prevent financial damage. If you trade with virtual money, you can see in real-time the strengths and weaknesses of your day trading strategy. If it turns out you don’t have the knack for it, then you haven’t lost any real money. And while it can be hard to watch paper profits pile up, at least you can use your success as an indication that you may have what it takes to succeed as a day trader.

Note that while paper trading has its benefits, it’s not the same as trading with real money. When real money is on the line, traders can often get emotional or think less clearly when things aren’t working out the way they want. Keep this in mind when making the leap from paper trading to real trading.

How You Can Avoid the Pattern Day Trading Rule

If you’re an active trader, it can be quite easy to get snared by the “pattern day trading” rule of FINRA. But there are some easy ways to avoid it, as well.

  1. Hold overnight: If you can hold your positions overnight, you won’t run afoul of the day trading regulations.
  2. Use different accounts: The “four or more in five business days” rule only applies per account.
  3. Keep your account balance above the requirement: If you keep your balance above $25,000 at all times, you’ll never risk violating the pattern day trading rule.

Day trading is an exciting, high-risk way to try to capture short-term profits. As most day traders ultimately lose money, it should only be pursued full-time by experts. But if you just want to day trade on your own to try and net some big gains, go about it in the right way. Keep enough cash reserves in your account to facilitate your trading, and use margin carefully and with an eye on your maintenance limits. Implement stop-losses to limit the damage when you’re wrong, and understand that short-term profits can also lead to high taxes if you’re successful. The best advice if you’re a new day trader is to start with paper trading or swing trading until you get a feel for how the markets operate. From there, you can expand to active day trading. But you should only risk capital that you are willing to lose.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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