How much money do you need to day trade?
That is the question many of us start off with. Let’s face it. Not all of us are backed by a prop firm, helping us out with tens or hundreds of thousands of dollars.
Most of us are coming to the game with a little bit of dough in the bank and not much backing.
We’re just a bunch of dudes (or dudettes) trying to get in on the game with what little money we have. And so the question gets asked of day trading: how much money do I need to start?
The first thing you should know about is the Pattern Day Trader law.
The organization behind it is known as the Financial Industry Regulatory Authority, or FINRA for short. FINRA looks to protect investor and market integrity.
One of the ways they do that is through Patter Day Trader laws. I won’t go into all of the details, but the one basic thing you need to know is this:
A “pattern day trader” is any customer who executes four or more “day trades” within five business days. Under FINRA rules, customers who are deemed “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts.
That’s the short and skinny of it.
If your account is under $25k, you are limited to three trades a week. You can’t truly be a day trader if you’re only able to perform 3 trades a week.
I actually learned this rule the hard way. I bought a stock (using my third trade of the week) and it was only Tuesday. Needless to say, I had to wait until the following Monday to exit the trade. You can guess which direction that trade went.
Trading With Less Than $25,000
Don’t be discouraged by the PDT laws. There are ways around it (you didn’t hear that from me!).
The way most US traders work around the PDT rules is by using an off shore broker. It’s not highly encouraged, and can be incredibly painful from a support standpoint, however, if you truly want to get into day trading, a broker like Suretrader is the best bet to start.
I don’t recommend them as your long-term game plan. You’ll find better tools and support with domestic brokers like thinkorswim or Interactive Brokers.
But if you have less than $25k to start with, and you truly want to day trade, you can avoid PDT laws by using on off-shore broker.
Trading With a Smaller Account
There are two options you have if you have an account of less than $25k.
1) You can still day trade, but be very selective and patient. Many folks have managed to successfully do this while they build up their brokerage account. You follow the rules and continue to make only three trades a week until you no longer have the PDT restrictions.
2) You find an alternative trading strategy. In a previous post I wrote about dividend investing as opposed to day trading. In this post I recommended you at least consider an alternative to day trading.
For smaller accounts, using a strategy like dividend investing is a great alternative. You no longer need to worry about timing your trades perfectly, and dealing with the confines of Pattern Day Trader laws. You can continue to work with a US based broker, research and pick great stocks, and now have the luxury of sitting back and being patient with them.
If you haven’t picked up a copy of The Great American Dividend Machine, do it now!
Bill Spetrino is a phenomenal teacher and has used dividend investing to create enough wealth that he was able to retire by the time he was 42 years old.
For most of us, that’s what we’re really looking for after all.
To summarize, if you want to know how much money you need to day trade, the answer is $25,000. Anything less than that is going to be restricting. If you want to work around those rules, sign up for an account with Suretrader.
If you wait to unleash your beastly day trading game plan until you have $25k in your account, using a dividend reinvesting plan is a relatively safe and time proven method for building wealth. It won’t get you there overnight, but you will be able to make a profit in the long run.
Have any of you had to work around the day trading rules? What have you done to get around it? Is there an alternative strategy you would recommend?