If you’re starting out, there’s a good chance you are wondering how to trade online stocks. If you’re like most, the question pressing on your mind is how much money you will need to start with to succeed.
“Just show me which plane is best and the basics of flying.”
Imagine that’s the way aspiring pilots starting with zero knowledge approached flying. It would sound crazy. Somehow that same craziness gets lost when it comes to trading.
“Look, I just want to know which one is the best broker. Teach me the basics of trading, like how to buy and sell and what to look out for. I’ll handle the rest. Buy low and sell high right? What more is there?”
Actually, there’s plenty.
For the rest of this article, put aside the following important trading considerations. Ample time exists to address them later.
FOR NOW, PUT ASIDE:
- Trading plan
- Fundamental analysis
- Technical analysis
- Commission and slippage
- Risk-adjusted Return
- Trading platforms
- Data Feeds
- Exchange Fees
- Tax implications unique to trading
- … and more.
I could go on for pages and I have done so elsewhere. But, let’s put it all aside for now and take a look at one simple consideration. The answer to it alleviates a lot of other concerns.
THE QUESTION COMES IN 2 EASY PARTS:
- How much money do you need to trade stocks?
- Do you have that much?
In this article, we’ll go through figuring out the answers to these two questions. And I’ll also give you five tips for avoiding Pattern Day Trader (PDT) rule issues in your stock trading.
How Much Money Do You Need To Trade Stocks?
I wish it were as simple as a calculation that’s used for any given trading strategy or trading goal.
Unfortunately, the long arm of the government and regulatory bodies want to keep us safe. They get the final word.
This information is crucial if you want to day-trade stocks with a small account size. The regulators consider any account that has less than $25,000 in it to be too small for day trading.
A “Pattern Day Trader” is a term defined by FINRA – the Financial Industry Regulatory Authority. FINRA’s definition of a Pattern Day Trader is:
Anyone who day trades [buys and sells or sell and buys the same security on the same day] four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.
If you trigger this Pattern Day Trader Rule, your account will be unable to open new trades for quite a while. Consider it being in the penalty box.
As an alternative, you can deposit extra funds into your account. You will have to deposit enough that the balance exceeds $25,000.
So if you have more than $25,000 to trade with, you are fine with regards to this rule.
But, if you do not have that much money what can you do? In this article, we’re going to cover how to trade online stocks and navigate the Pattern Day Trader rule.
How To Trade Online Stocks – Tip #1: Success through strategy
Day trading started as something that occurred on the exchange floor. Then it became a particular methodology for online traders in the late 1990’s. Most now use it as a description of an active trader does.
A trader can deploy strategies on a higher time frame. The goal is to reduce the number of trades that open and close within the same day.
The possibility that some trades on the same symbol will open and close on the same day still exists. But strategy calibration reduces the chances that it happens on 4 out of 5 consecutive days.
In a nutshell, you are minimizing the occurrences of the round-turn trades. And round-turn trades are what count against you in the PDT rule.
Beat The PDT Rule By:
Picking the right strategy and timeframe.
How To Trade Online Stocks – Tip #2: Prosper through product selection
Stocks are great. Yet they are only a small percentage of the instruments traded worldwide. Commodity futures contracts, Forex pairs, and CFDs are all worthwhile choices.
Each trading instrument type has different requirements. None of the other choices include requiring $25,000 for active trading.
“The Pattern Day Trader rule only applies to stocks… consider futures or Forex as an alternative.”
The good news is many technical analysis and trading skills apply to most markets. A trader can learn, hone and master them with different trading instruments.
This cross-compatibility means a trader can learn and excel in the futures market. The same trader can later make the switch to stocks if they want to do so. So you can grow your account to over $25,000 outside of the stock market and then transfer there once you’re ready.
Beat The PDT Rule By:
Using trading instruments other than stocks.
How To Trade Online Stocks – Tip #3: Trade at proprietary firms
Proprietary trading firms offer yet another way to make the Pattern Day Trader rule a non-issue.
Proprietary trading firms train traders. They then allow those traders to trade a part of the firm’s money. The firm does so in exchange for a percentage of profits generated by the trader.
Because the trader is trading the firm’s capital and not his own deposited funds, the PDT rule does not apply. There are other benefits and compromises of joining a proprietary trading firm. However, one certainty is that this solution requires a much larger commitment.
Beat The PDT Rule By:
Joining a proprietary trading firm.
How To Trade Online Stocks – Tip #4: Find an alternative broker
Clients and fellow traders alike use brokers operating outside of the United States. These brokers have managed to offer U.S. based stock trading without having to enforce the PDT rule.
I have looked into some of these firms, and the opportunity does seem to be legitimate. But, I have never attempted to open an account, trade or withdraw money with any of them.
“One way to beat the Pattern Day Trader rules is to use an international broker.”
If the first three ideas above do not work for you, it may be worth investigating. These international brokers have a unique feature that solves a very real issue for many.
[Note: One brokerage that gives you a way around the Pattern Day Trader rule is SureTrader in the Bahamas.]
Beat The PDT Rule By:
Opening an account at a broker that does not require you to comply with the PDT rule.
How To Trade Online Stocks – Tip #5: Saving the best for last
In this article, you learned 4 very viable options for being able to day trade for under a U.S.$25,000 account balance.
Remember that the Pattern Day Trader rule is only one hurdle. There is no substitute for practice and a well-developed ability to trade.
You the trader are the most important element of all.
The piece of advice that I offer the most is this. Paper trade until you can manage consistent profits for at very least a few months.
Losses in a simulated account will not impact your finances. The benefit is that you will learn an incredible amount without risking money.
Addressing a $25,000 PDT minimum balance is illogical if you are not yet proficient at trading. That goes for any other requirement imposed by an outside party as well.
You might find it sound advice for the novice pilot to ignore the regulations for now. The novice pilot should learn as much as possible about flying first. Then practice on a simulator to avoid unnecessary accidents and scares. Change the word “pilot” for “trader” and “flying” for “trading” and this applies as well for traders.
Beat the PDT rule by:
Starting with a paper trading account to master the skills required to be a successful day trader.
Do You Have Enough To Day Trade?
Successful traders focus on trading ability and invest in their skills and knowledge. However, those that fail often blame their lack of capital.
Be smarter than that. Be the trader who develops trading ability rather than worrying about account minimums.
For more day trading techniques, tools & strategies, check out these articles:
- 5 Must-Know Basics For Day Trading Beginners
- 7 Steps To Options Trading Success
- #1 Way To Practice Trading Options
Navigating the PDT rule is a large factor when learning how to trade online stocks.
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