Pattern Day-Trade with Less Than $25,000

Pattern Day-Trade with Less Than $25,000

If you read the rules of day-trading, you'll find that pattern day-traders are required to have a minimum balance of $25,000 in their margin accounts. These rules are established by FINRA (Financial Industry Regulatory Authority), and all brokers are required to ensure traders follow these rules.

A pattern day-trader is defined as someone who day-traders (buys and sells the same security in the same day, or short sells and then buys) four or more times per week. If a trader meets these conditions, then they will be labeled as a pattern day-trader and will be required to maintain a minimum of $25,000 in their margin accounts.

Related: Stocks vs Forex: Why Trade Forex?

A non-pattern day-trader, in which you day-trade no more than 3 times per week, is required to have a minimum balance of $2,000 in their margin account.

These rules make it difficult for investors to practice day-trading, and it encourages beginning investors to risk a lot of money just to get in the game. However, these rules do not apply to all types of accounts.

Pattern Day-Trading in a Cash Account

What many brokers neglect to mention is that you can pattern day-trade as much as you want in a cash-only account without any minimum balance, other than if a broker requires a minimum balance for all accounts. Ask your broker about day-trading in a cash account and they are likely to tell you either yes (there is no limit to day-trading) or they only offer margin accounts.

However, most successful day-traders aim for only a 1% to 2% increase on the money they trade, which is $100 to $200 per day if you trade with $10,000 each day. Day-traders who claim to make $1,000 in one day are trading with almost $100,000 per day, buying and selling thousands of stocks in one day, often on margin. Matching this more successful strategy with $1,000 will result in only $10 to $20, which may be barely enough to cover trading fees.

Furthermore, there are additional restrictions applied to cash-only accounts, such as the rules for settlement dates, as well as rules against short selling.

Settlement Date Restrictions to Day-Trading in Cash Account

Settlement dates for stocks are three business days (also a rule established by a government authority) during which time your money will be unavailable to trade. If you try to trade with this settlement money, you are likely to receive severe warnings from your broker, potentially resulting in them locking you out of your account for 90 days.

What this means is if you trade with all your available cash in one day, then you will be unable to trade again until your trades have settled three business days later, not including the trade date. If you trade all your cash on Monday, your funds will not settle until Thursday.

The benefit of having a margin account is that you can trade with borrowed money during this settlement period, allowing you to day-trade every day with all your money. Once you have sufficient funds, day-trading with a margin account is a good idea so you can still trade while funds are being settled.

Cash accounts also have limits to the types of trades you can make.

Additional Limits to Day-Trading with Cash Accounts

In a cash-only account, you cannot borrow money or stock. This fact means that you cannot practice short selling stock in a cash account. If a stock is going down, you will just have to wait for it to start going back up in order to attempt to make a profitable trade.

Short selling stock is another benefit of a margin account, allowing you to profit from both the ups and downs of the market. If you have at least $2,000 available for trading, ideally $3,000 so you don't drop below the $2,000 minimum, you might consider practicing short selling stock in a margin account. Just be careful to not day-trade more than 3 times per week (3 total trades) or risk being labeled as a pattern day-trader. Removing this label often requires no day-trading for several months.

How to Practice Day-Trading

The best way to practice day-trading is to trade with a small amount of money (less than $100) at a loss due to commission, in order to test and develop strategies. Your goal should be to attempt to gain a 1% or 2% increase, which is the strategy that long-term day-traders use.

On $100, that's only a $1 to $2 increase, which would not even cover the trading fees, but it also reduces your risk, since you might only lose $1 to $2 on the trade. It also forces beginning investors to truly practice strategy, since they are not focused on trying to cover the trading fees. A beginning trader might neglect a 2% increase, hoping for a 2.1% increase so they can make some profit on their trade, only to see that 2% increase disappear.

Ultimately, if your goal is to make money in the beginning while you are learning, then you will likely give up or fail to learn well enough to make a profit on a larger amount.

Remember that most investors lose money. If you want to be one of the few traders that makes a consistent profit, you need to develop your trading skills, which will take time. Beginning investors will often try to learn day-trading with larger amount of money, and then lose large amounts of money due to their inexperience.

Best Broker to Practice Day-Trading: Robinhood

The best broker to practice day-trading is Robinhood, which offers a $0 commission on all trades resulting in your $1 increase on $100 actually being profit. Rather than making money directly from you, they operate like a traditional brokerage that raises funds like a bank. They earn interest on uninvested money, and they also profit from people investing directly into them as a business. More than $66 million has been raised by people wanting a piece of the company.

Currently, at the time of writing this article, they only offer cash accounts, but they are beginning to test margin accounts. Trading with a margin account will incur a small interest charge when you borrow money by trading on margin.

Nevertheless, they will likely remain the cheapest broker for a long time, allowing you to focus on practicing and developing strategy, as well as making profit. Currently, their trading platform is only available for the Google Android OS and Apple iOS. There is no Robinhood platform for a traditional computer or web-browser.

If you do not currently own an Apple iPad or Google Tablet, spending a little bit extra in order to access virtually unlimited free trades through Robinhood's app is well worth it.

Here's the link to Robinhood's website. Note: No one from InvestGrowRepeat.com receives any commission from referring Robinhood. This recommendation is from personal experience of using Robinhood's trading app, and from a sincere appreciation of $0 commission.

Stocks vs Forex: Why Trade Forex?

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Download this easy-to-use Stock Profit Calculator. Just type in the stock price and it will automatically fill with stop-losses and profit goals. You can also change the percentages to match your personal needs, as well as enter in your margin use in order to keep your stop-loss at -1% of your account value.

The cost is only $1, which is just to help cover the costs of the automated system to send you the Calculator.

Stock Profit Calculator for Daytrading/Day traders - InvestGrowRepeat.com

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