Day Trading Restrictions on US Stocks
What You Need to Know
The U.S. Securities and Exchange Commission (SEC) has imposed restrictions on the day trading of U.S. stocks and stock markets. These prevent "pattern day traders" from operating unless they maintain an equity balance of at least $25,000 in their trading account. That means that to regularly day trade stocks in the U.S., you need at least $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 percent 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.
Individual stockbrokers may have more stringent definitions. If a broker believes a trader may be engaging in day trading activities or the trader is frequently 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, they will be prevented from making further day trades until the equity balance in the account is increased to $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 U.S. are allowed to use up to 4:1 leverage. That means that if a day trader deposits $30,000 in his account, he can accumulate positions up to $120,000. Traders that hold positions overnight are allowed leverage up to only 2:1.
Day traders 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 his 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.
The $25,000 equity balance restriction applies only to U.S. stock markets; other markets' day trading restrictions vary. The U.S. 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, all markets—including the stock market—are a viable option.
Day traders with less than $25,000 in capital will need to acquire more capital in order to day trade the stock market, or they can participate in the futures or forex markets, which also are viable day trading markets. To day trade futures, it is recommended that a trader has at least $5,000 to $7,500 (or more) in starting capital. For forex day trading, it is recommended that a trader have at least $500, but preferably $1,000 or more, in initial trading capital.