Day trading accounts have certain size requirements to open. Yet, there is an important question that needs asking first. The answer is necessary before we get into minimums, margins, and requirements:
“How much money should I start day trading with?”
Zero. That’s in U.S. Dollars, Euros, Pesos, Rupees, or whatever local currency you happen to use. It applies to stocks, options, futures, Forex and everything else you can trade.
Disappointed in the answer? Good. If you’re still reading, it means you are more serious about trading. You have a much better chance than the person who stopped reading when they saw the first word.
All trading involves uncertainty, investigation and improving yourself. “How much money should I start day trading with?” parallels questions like “How much horsepower should I start driving with?” or “How many chainsaws should I start juggling with?”
You have to be neither driver nor juggler to realize that those are the wrong questions. Those questions do not help anyone excel in either field.
Money is a vital component of trading. But the importance of the amount of capital you start with is only one component. And it’s a component that pales in comparison to the skills that are necessary for success.
Making it to the end of this article and taking action will save you a ton of money. Sit tight, pay attention and let’s work together to give you the best chance of day trading success. Here are the key considerations you need to know when setting up day trading accounts.
Day Trading Accounts – Consideration #1: Start out safe from the beginning
Nobody likes to hear it. Most come around after losing some money and hope.
“The best way to start is through simulated trading.”
This idea rings true whether you have a plan, training, or so much money it would be difficult to lose it all. The reason is that trading well takes practice.
Practice builds ability, confidence, and greater certainty. Moreover, those are all traits that serve a trader very well when it comes time to risk real money.
Pilots, astronauts, and soldiers are some of the professionals who use simulations. They are an unparalleled training tool. These professionals use simulators because there is a lot at stake.
The equipment that they use is expensive. Their missions are important. And safety tops the list of reasons why they practice in a simulated environment.
Your safety, money, and livelihood should be the highest priority. There will be nobody that cares about those things as much as you. For this reason, you need to start simulated in your day trading accounts.
The desire to make money is in many of us. Bear in mind that those traders who begin too early and fail share something in common. The lack of proper preparation is an obvious one.
But there’s something else more insidious that is working against that person. That something is a lack of self-control.
For the best long-term results, start day trading with a focus on process and strategy. The best way to do this is to start off safe by testing your skills in a risk-free environment. This risk-free environment is created through simulated trading.
Day Trading Accounts – Consideration #2: Size should be dictated by the trading instrument you pick
At a very basic level, your broker dictates your capital requirements. In turn your broker is following guidelines and rules set by the various exchanges.
Let’s take an extreme example. Consider one share of Warren Buffet’s Berkshire Hathaway Class A stock. Buying one share at the time of this writing would cost a quarter million U.S. dollars.
Using typical 2:1 leverage, you could buy a share for $125,000. Aggressive intraday leverage allows you to buy a stock that is 4 times the money in your account. That would reduce that requirement to $62,500.
This is still a lot of money and is the very least that you would need to trade one share.
“The instrument you trade greatly affects the account size you will need.”
Commodity futures products and Forex brokers have similar sorts of requirements. But their rules for those products let traders use much more leverage. There are cases where having as little as $1,000 will allow you to trade Forex positions greater than $100,000.
For those who are newer to trading and immediately had their eyes light up, consider this. Using $1,000 to make a trade worth $100,000 means that half your money is at extreme risk.
Half your money is gone if the trade moves half of one percent in the wrong direction. A one percent move against your position means your account is empty.
Size your account according to what the instrument requires. And always be mindful of using too much leverage. Conservative is better when it comes to leverage in your day trading accounts.
You want to consider your capital necessity. It’s important. At the same time, try to manage with lower leverage than some brokers will give you.
Day Trading Accounts – Consideration #3: Size is also dictated by government regulations
The idea of day trading stocks attracts a lot of new traders. Stocks are a great market, but an important aspect of day trading stocks is the pattern day trader rule.
This rule requires pattern day traders to maintain an account equity balance of at least $25,000. The penalty for falling below this amount is account suspension. This means you can’t open any new positions.
Over-trading also results in an account getting suspended for three calendar months. FINRA (a financial regulatory body) continues to enforce the pattern day trader rule.
A pattern day trader is anyone who places four or more round turn trades in five business days. And that is the absolute smallest amount any serious day trader should be trading. The rule succeeds at accomplishing its goal… it discourages stock day traders.
This rule forces you to have at least $25,000 in your account if you are going to be day trading stocks. It’s also advisable to have a healthy margin of error on top of that. Even a healthy dose of blind luck makes it difficult to profit enough to avoid triggering this rule.
[Note: There is one broker located in the Bahamas called SureTrader that allows you to day trade with less than $25,000.]
Day Trading Accounts – Consideration #4: Size is dictated by your own personal situation
There is a lot to consider when getting into day trading. Even though it’s the topic of this article, how much money you need to start out is still among the least important. As mentioned above, the real answer is zero (when you start with a simulated account).
Learning should always come first. Finding a strategy that you can execute and a plan that suits your needs comes soon after. Finish the prerequisite steps and then plan your first real-money account funding.
“Learn now. Risk later. Most importantly, know your situation.”
Let your simulated trading performance dictate your live account trading needs. Trade for a few months on a simulator.
Set your starting capital as low as you can. Or have it reflect the current risk capital level you are willing to lose. Achieve simulated trading success first.
Then transition to live trading with real risk. Start off small again. There are subtle yet impactful differences between simulation and real life.
You can always ramp up your trading later. You can never take back big trading mistakes.
Learn to trade well first. Doors will open and opportunities will present themselves as a result. Remember that it takes zero dollars to risk when getting started with day trading.
If you have money, invest it well in building your trading skills. Those skills will last you a lifetime and do more for you than even the luckiest of starts in day trading.
For more day trading techniques, tools & strategies, check out these articles:
- 8 Essential Tips For Day Trading Options
- How Do Margin Trading Accounts Work?
- Online Trading Brokers & After Hours Trading
Make sure you understand these four sizing considerations for day trading accounts. They are important when opening an account and to keep yourself safe.
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