Day Trading Restrictions on US Stocks

What you need to day trade stocks in the US

stock market day trading restrictions
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The SEC (US Securities and Exchange Commission) has imposed restrictions on the day trading of US stocks and stock markets. The restrictions prevent "pattern day traders" from day trading US stocks unless the trader maintains an equity balance of at least $25,000 into their trading account. That means that to regularly day trade stocks in the US, you need at $25,000 of your own capital in your trading account.

Pattern Day Trading

The SEC defines a day trade as any trade that is opened and closed within the same trading day. They define pattern day trading as four or more day trades within five trading days, assuming that the number of day trades is more than 6% of the total trades taken in the five day period. This percentage stipulation isn't a factor most of the time; if you are taking four or more day trades in a five day period, you will be classified as a pattern day trader and subject to the $25,000 equity balance in order to day trade.

This means that even one day trade per day would classify the trader as a pattern day trader, and the restrictions would then apply.

This is how the SEC defines a day trader, but individual stock brokers may have more stringent definitions. If a broker believes that a trader may engage in day trading activities, or the trader is often taking two or three day trades in a five day period, that broker may impose the $25,000 minimum equity balance on that trader.

In this case, the trader will need to maintain that balance if they wish to make any day trades. Check with your individual broker on day trading restrictions.

Preventing Day Trading

If a trader is classified as a pattern day trader according to the SEC definition (or by a broker's discretion), and the trader does not have the required $25,000 equity balance in their account, then they will be prevented from making further day trades until the equity balance in the account is brought above $25,000.

Day traders are only required to have the $25,000 balance on the days that they day trade.

Day Trading Leverage or Margin

Day traders in the US are allowed to use up to 4:1 leverage. that means that if the day trader deposits $30,000 in their account, they can accumulate positions up to $120,000. Traders that hold positions overnight are only allowed leverage up to 2:1.

While US stock market day traders are required to have at least $25,000 to day trade, they are allowed to have more leverage since their positions are short-term and therefore each trade is likely to experience smaller price swings compared to positions held for days, weeks or years.

If a trader exceeds their allowed margin, as their own deposited capital begins to drop because of a losing position, then the day trader will be issued a margin call.

Other Markets

The $25,000 equity balance restriction only applies to US stock markets (other country's day trading restrictions vary). The US futures and currency markets don't have set equity balance requirements for day trading (except for broker required deposit minimums and margin requirements on each asset). Therefore, if a day trader has at least $25,000 to trade with, all markets--including the stock market--are a viable option.

If a day trader has less than $25,000 in capital, they will need to save up more capital in order to day trade the stock market, or they can participate in the futures or forex market instead--which are also viable day trading markets. To day trade futures it is recommended a trader has at least $5000 to $7500 (or more) in starting capital. For forex day trading, it is recommended a trader have at least $500, but preferably $1000 or more in initial trading capital.