Trading might sound stressful to some but those who are passionate about it often turn it into a profitable business. To understand trading, especially day trading, one needs to understand its various aspects which may take years. As a rookie, you are more prone to making losses than profits. If you want to step into this world, you need to consider various factors. Day trading refers to buying and sharing shares over the internet during a single day. An aspirant hopes to make a profit with daily fluctuations.
There are many things that cross a new day trader’s mind is how much money they need to maintain their trading account or what kind of account do I need to day trade? The Financial Industry Regulatory Authority (FINRA) in the U.S established that anyone who makes four or more trades in a day, opening and closing a stock position within 24 hours, for a period of five days with these activities being more than 6% of the total trading activities, is considered a day trader. Once you fall into this category, you need to maintain a minimum account balance of $25000.
Day trading account with less than $25000 is possible only if a trader trades other assets than stocks or trades outside of the USA, using a broker outside Financial Industry Regulatory Authority jurisdiction.
Read our article Do Pattern Day Trading Rules Apply to Forex to learn more about how to trade forex to avoid PDT rule.
The Evolution of Equity in Trading
In 1974, when electronic trading was ineffable, the minimum equity requirement was barely $2000. Then, traders had to make a long-term commitment. Thus, this amount was considered sufficient.
The need to increase the minimum equity rose when transactions became electronic and traders were allowed to change their status daily. Now, traders need more to cover the risk and satisfy margin calls, leading to a demand from a broker for raised equity during given trading. This was initiated by the brokerage firms to create an effective cushion against the margin calls.
If you don’t usually day trade but end up doing four or more such trades within a week, with no day trade the next week, you will still be classified as a day trader. Hence, your brokerage firm would ask you to maintain $25,000 as equity in your account.
You will be given enough options to maintain this liquidity. You can hold this amount in cash or other eligible securities. The only restriction is that they must be in your trading account at your brokerage firm. You cannot show proof of fund that is laying in a bank or with other monetary authorities.
It is imperative to have $25,000 in your brokerage account prior to any day-trading activities. If you do not fulfill this minimum requirement, you will not be allowed to trade. This balance has to be maintained while you are trading.
So, how can I day trade with less than $25000?
What to Do if You Don’t Have the Minimum Equity?
Pattern day traders who successfully maintain the required equity enjoy a plethora of benefits. For example, they can trade with additional leverage by borrowing money to place larger bets. While a traditional stock investor can trade with a maximum of 2:1 leverage, day traders have the liberty to trade at 4:1 leverage.
Yes, having the minimum equity is beneficial, but day trading with less than $25,000 is also legally possible. There are several loopholes and trading strategies that can help you. While it is ideal to have the minimum equity, this is what you can do:
- Trade for only three days. How many trades per week? You are considered a day trader when you trade for four days or more within a week. Since you will be trading for a day less, FINRA’s rules will not be applicable to you. If you are taking this route, make sure you pick up valid trade signals.
- You can day trade outside the U.S if three days are not sufficient for you. You will need the help of a broker set up outside the states for this. Found out markets where having a day trading account with less than $25,000 is possible. You must consult the tax and legal professionals before you venture into international stock trading.
- Collaborate with a day trader firm. You will be required to deposit some amount but it wouldn’t be close to $25,000. The additional amount is chipped in by the firm. Here your amount acts as a safety net, protecting them in case you make losses.
- Try swing trading. Swing traders work on a broader spectrum and analyze the trends that play out for days or weeks rather than the one-day trends that may or may not last more than 20 minutes. You can try this method until you have the required equity for day trading.
- Wondering how to day trade unlimited? Opening multiple accounts with different brokers is one way. Consider this: open two trading accounts with two different brokers and two three-day tradings using both the accounts. This will allow you to do six trades within a period of five days. The more accounts you have, the more trades you can make. However, this is not an optimal solution as you already have limited capital. If you continue this practice, you will be spreading yourself too thin too soon. Also, small capital accounts are not optimal for making larger profits.
If you are wondering ‘how can I day trade with less than $25,000′, you can consider the above factors. These loopholes are not ideal but not illegal as well. If you are considering any of the above options, keep in mind that brokers are always one step ahead of you. They can read your patterns and know if someone is day trading even if they are doing in for less than 4-days a week. You can opt for any alternative only for a short period of time or till you have $25,000.
Day Trading on Different Platforms
If you do not want to risk your credibility in the stock market, a better alternative for you would be to change markets. This is how you can day trade in different markets:
Forex
The currency market runs 24/7. Here you can start with just $500. You need to trade currencies in pairs like USD/JPY or GBP/INR. You will get leverage of 5:1 which is more than day trading. So, if you are starting at $500, you can hope to make $25,000. Profits and losses can mount equally in this market. If you are wondering how many trades per week you can do, the answer is as many as you can afford.
Futures
The futures market deals in stock index futures like the E-mini S&P 500 and other commodities like gold, oil, and copper. Futures give you a lot of leverage. You can start even at $400. A small capital in the case of the E-mini contract, allow you to make a significant profit as the products typically move 10 or more points a day, with each point worth $50Just like profits, you can end up with huge losses as well. It is advised to start in this market at $2500.
Options
If you are adamant about day trading, the options market is another promising alternative. Options are a derivative of an underlying asset, such as a stock. Therefore, you are not required to pay the upfront cost of the asset. This market fluctuates a lot as the value of the option contract changes continuously when the underlying cost fluctuates.
Conclusion
When it comes to the finance market, especially trading, there are plenty of loopholes. If you do not have $25,000 to deposit as minimum equity, you can still venture into the world of day trading. There are various investment options that do not require a significant investment. The options are endless.
However, you must remain informed. The stock market is lucrative as long as the odds are in your favor. You need to assess your risk tolerance and do thorough research. Those who treat it like gambling often suffer huge losses. If you are new, you must take the help of professionals. It is advisable that, first, you try to arrange the minimum equity of $25,000 as it does have several benefits. Consider the alternatives only when the former is not possible.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
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