How To Day Trade a Small Account Under $25,000:
How To Day Trade A Small Account - Under $25,000
By William Bell, GPSM Staff Writer
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For Traders Who Know How, Day Trading Stocks Is A Valuable Trading Strategy... But What If Your Account Is Small?
Hey guys it's Will,
The SEC has put in place the PDT rule (Pattern Day Trader Rule) because day trading carries a very high risk/reward ratio.
***Disclaimer “Day trading can be extremely risky…You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or homeownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.”***
A pattern day trader (PDT) is a regulatory classification for traders or investors that use a margin account to conduct four or more day trade transactions in a five-day period.
During that five-day period, the number of day trades must account for more than 6% of the entire trade activity on the margin account. When this happens, the trader's broker will mark their account as a PDT.
The PDT designation imposes certain limits on subsequent trading, with the goal of discouraging investors from engaging in excessive trading.
If you want to know how to day trade without $25k and avoid the PTD Rule then this trading strategy is for you.
We'll go through how to get started, how to go around the PDT regulation and some other helpful hints.
But, before we get started, keep in mind that day trading is extremely risky. The majority of new traders lose money, and most traders with tiny accounts lose money much more.
So, when you embark on your day trading adventure, bear this in mind.
The PDT Rule
The dreaded pattern day trader (PDT) rule is immediately learned by any US-based potential day trader.
Traders with less than $25,000 in their margin account are only allowed to make three day trades in a rolling five-day period, according to the PDT.
So, if you make three day transactions on Monday, you won't be able to make any more until the following Monday.
Many would-be day traders either give up or transfer their attention to swing trading or the futures market after learning this.
While those are valid options, day trading stocks with less than $25,000 in your trading account is still possible, and we'll go over a couple strategies in this article.
Creating Multiple Brokerage Accounts To Out Strategize Your Small Account
Opening multiple brokerage accounts is a common strategy suggested by many day trading teachers.
For each additional brokerage account you open, that’s another three day of trades per rolling five-day trading period.
Unless you're using a scalping method, most traders will be satisfied with six or nine day transactions every week, therefore this is a reasonable option for most traders.
However, there is a risk that you will end up spreading your funds too thin. Since you already have a little capital to deal with (less than $25,000), breaking it up could slow down your gains.
You’re forced to create smaller cash position sizes than you could have chosen otherwise.
For those traders with account amounts nearing or beyond the PDT ($25,000 and up), I believe this strategy makes sense. If it's any smaller, I believe you're spreading yourself too thin. This, however, is highly dependent on the asset class you trade.
Due to the general extreme volatility associated with penny stocks, your average position size in a $17,000 account might still be $500 or $2,000 if you trade high-risk, high-reward penny stocks like I do.
One of the major advantages of this strategy is that many discount brokerages now give commission-free trading.
In the old days a $9.99 commission fee on a $1,000 trade already puts you 1% in the red, commissions was once indeed the main obstacle to opening several brokerage accounts.
Fees play a vital role in a day trade.
Advantages Of This Discipline
• For every extra account you open, you get three additional day trades every week.
• Commissions are no longer a hurdle to multiple account opening.
The Disadvantages Of This Discipline
• Smaller position sizes are used.
• Keeping track of your total positions and profits and losses are hard.
• Tax season is more work since you must gather more paperwork and keep track of increases.
Getting a Cash Account
I’m always juiced when day traders don’t know that the PDT rule doesn’t apply to all cash accounts.
You see in a cash account; you can make as many day trades as you like.
However, there is a catch. You must be trading with cash that has already been settled.
The SEC's cash settlement restrictions are one of the main reasons why margin accounts have become the go-to standard account type in the United States.
According to the rules, when you sell a position in your brokerage account, the cash proceeds must ‘settle.' Before you can take another trade.
This means you won't be able to use the money for two days after the transaction. If you traded on Monday, you won't be able to use that money again until Thursday.
So, if you have a $5,000 account and make a day trade with $4,000 of it, you can only trade with $1,000 until the balance of your cash settles. Day trading like this, as you can guess, may soon turn into a nightmare that's even more restrictive than dealing with the PDT rule in a margin account.
Cash accounts, in my opinion, excel when it comes to traders who aren't attempting to make big-time money from their trading accounts.
A cash account becomes a simple way to conduct numerous day trades with real money without worrying about the PDT if you stick to small position sizes and approach day trading from the angle of building experience and making small wins vs rather than a “million-dollar tomorrow” profit of possibility.
Advantages Of This Discipline
• Day trades are unrestricted.
• Ideal for traders who prefer to trade in small increments.
The Disadvantages Of This Discipline
• You must trade with cash that has been settled (major con)
Brokers that aren't based in the US lets traders can avoid stringent securities requirements by using what is called an offshore broker.
Still guys, be warned that some of those securities restrictions were put in place to protect you, and when you sign up with an offshore broker, you’re giving up some of that safety.
Be mindful of all the dangers and pay special attention to the forms you sign!
These brokers often charge greater commissions and subscription fees for their active trading platforms than their domestic rivals.
In addition to being able to avoid the PDT, offshore brokers frequently provide greater leverage than domestic brokers.
It's not uncommon for an offshore broker to offer 6:1 intraday leverage.
Using a Single Brokerage Account
Having a single margin account where you keep all your trading funds has its advantages too.
Of course, you'll be limited to the PDT Rule which is three-day transactions every week, but for some traders, this restriction may be beneficial.
It wouldn't be hard to assume that those with modest trading accounts have little or no successful trading experience.
As a result, the PDT can occasionally work in their advantage. It can also serve as a capacity for discipline, as an addition to simply slowing the rate of their losses.
The PDT can force you to only take the best setups, helping you to conserve your cash until you notice a near-perfect opportunity.
Your Trading Time Frame
It doesn't make sense to trade on a one-minute chart if you only have three-day transactions every week.
You're not successfully maximizing the profit potential of each day transaction you have if you do this.
I believe that trading on a longer-term intraday chart is more reasonable.
If you ask me, at least 30-minutes to an hour, certainly, would be less exciting and things will go more slowly, but it may be a good thing!
If you read interviews or writings of successful traders in books like Benjamin Graham's The Intelligent Investor, you'll get the impression that trading should be boring.
Trading should not be used as a substitute for playing Craps or sitting at a Blackjack table, but rather as a job that you excel at and that rewards your good decisions with more money.
This guideline should apply to everyone, but all in all, we're not machines, and we frequently choose the thrill and excitement that gambling brings above taking the smart, disciplined path to trading profits.
The PDT has the advantage of requiring you to sit on the sidelines until a good setup appears.
As a PDT trader, you should always have a voice in the back of your mind wondering, "Is this setup strong enough to use one of my day trades on?"
Hopefully, this trading discipline developed while you were on the PDT will become a beneficial habit that you will continue after the PDT is no longer an issue.
Avoid These Mistakes
Holding Overnight To Avoid PDT Rule. This is one of the most typical errors I see day traders make while using the PDT.
You specifically selected the stock as a day trade.
Traders enter a trade at or near market open, and as the session closes, they begin to justify why they should hold the deal overnight rather than employing a day trade.
I'd say that those traders are better off employing a day trade, and closing the transaction 18 times out of 20 because you selected the trade as a day trade.
Since the trade was selected for a day trade treated as such and keep to the plan.
You're risking all of your gains, plus potential losses, unless there's a true brilliant setup on the daily chart.
You're at the mercy of the next day's open, which is the most volatile period of the trading session, if you hold overnight.
All of your winnings could be wiped out in the first five minutes of trading, or you could see that the stock is down, and you sell your shares out of fear of more losses only to see the stock go back up shortly after you’ve dumped your shares into the open market.
I can't tell you how many times this has happened.
Due to PDT, Your Position Size Is Larger Than It Should Be.
Those that are affected by the PDT would frequently inflate their deals because they know they only have a few chances to make day trades that week and want them to be as profitable as possible.
There are no shortcuts guys and you shouldn’t be increasing your capital risk on each trade because of the PDT Rule.
Even good setups have an unknown failure rate, and losing streaks are always possible and likely over long periods of time.
Trying to get over the PDT carries the risk of putting you out of the game entirely because you lost all your money on a bad trade, so you must be a disciplined trader who sticks to your plan while you figure out what works for you.
In Closing and to be fair…
So far, we've looked at some terrific ways to get started day trading with less than $25k in your brokerage account as well as some trading recommendations for smaller accounts.
If you don't approach day trading correctly, it can be dangerous, and wipe out your account, so take your time, study the basics, and start with an amount you can feel comfortable with.