How to Day Trade Stocks with Less Than $25,000
The Financial Industry Regulatory Authority (FINRA) has established a pattern day trading rule that all brokers in the US must follow. This rule says that any stock trading customer who makes four or more-day trades in a five-day period must be considered a pattern day trader. Pattern day traders are required to have a minimum $25,000 account balance.
FINRA established this rule as a way to cover risks associated with day trading stocks. The previous rule established in 1974 only required $2,000 minimum equity. The jump in equity seems to put day trading out of reach of the everyman, right? Not necessarily. Let’s examine how the new day trading rules can work to your favor if you have less than $25,000.
Trading Stocks with Less Than $25,000
You can still day trade stocks if you have less than $25,000 in a margin account. You will be limited in the number of trades you can make per five-day period, but with a good strategy, you can still day trade. Let’s examine some of the ways you can day trade without $25,000 in your margin account.
- Make Three Trades in Five Days: FINRA’s new day trading rules says a pattern day trader is someone who makes four or more day trades in a five-day period. If you can keep your trading activity below three trades, you will not be marked as a pattern day trader. Some brokers even make it easy to make sure you don’t over-trade by placing limitations on your account. Robinhood offers day trading protection to prevent you from making trades once your five-day limit has been reached.
- Day Trade Stocks Outside the US: FINRA’s new pattern day trading margin rule only applies to brokers inside the United States. Not all foreign stock markets require the same account minimums or day trading rules. Look into other markets to see if there are day trading opportunities for you there.
- Day Trade Without Using a Margin: You can day trade with a cash account and use no margin, so you aren’t subject to the pattern day trader rule. The downside of this method is that you can’t short stocks. You also can’t sell naked options using a cash-only account. You will only be able to buy puts and calls using a cash account.
- Consider Swing Trading: The difference between swing trading and day trading is that swing trading strategy plays out over days or weeks. While this does require an adjustment in strategy, swing trading is just as actively involved as day trading. Swing traders can trade each day actively and don’t need to meet a $25,000 margin requirement.
- Multiple Accounts with Different Brokers: This less than scrupulous option is a way to get around the limit. Having two accounts with two different brokers will net you six trades a week instead of three. This loophole severely limits your capital since it is split between two accounts. Most brokers require a hefty deposit for day trading, which you may not be able to meet for two accounts.