How to Day-Trade With Less than $25,000

Day trading with less than $25,000
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When you set up a brokerage account to trade stocks, you might wonder how anyone is going to know whether you're a bona fide "day trader." Your broker will know, based on your trading activity.

The Financial Industry Regulatory Authority (FINRA) in the U.S. established the "pattern day trader" rule, which states that if a stock-trading customer makes four or more day trades (opening and closing a stock position within the same day) in a five-day period, the customer is considered a day trader and must maintain a minimum account balance of $25,000.

Background on the Increased Equity Requirement

Back in 1974, before electronic trading, the minimum equity requirement was only $2,000. New technology changed the trading environment, and the speed of electronic trading allowed traders to get in and out of trades within the same day.

Since day traders hold no positions at the end of each day, they have no collateral in their margin account to cover risk and satisfy a margin call—a demand from a broker to increase the amount of equity in their account—during a given trading day. Brokerage firms wanted an effective cushion against margin calls, which led to the increased equity requirement. 

Perhaps you don't usually day-trade but happened to do four or more such trades in one week, with no day-trades the next or the following week. In this scenario, your brokerage firm would still likely classify you as a day trader and hold you to the $25,000 equity requirement going forward. 

You can meet the equity requirement with a combination of cash and eligible securities, but they must reside in your day-trading account at your brokerage firm rather than in an outside bank or at another firm.

On the plus side, pattern day traders that meet the equity requirement receive some benefits, such as the ability to trade with additional leverage—using borrowed money to make larger bets. A stock day trader can trade with 4:1 leverage; typical stock investors (including swing traders and those who tend to buy and hold) can trade with a maximum of 2:1 leverage. 

Day-Trading Loopholes

If you don't happen to have $25,000 to day-trade, there are ways of getting around that requirement. They consist of loopholes and alternative trading strategies, most of which are admittedly less than ideal.

  • Make only three day trades in a five-day period. That's less than one day trade a day, which means you'll need to pick and choose among valid trade signals, so you won't receive the full benefit of a proven strategy.
  • Day-trade a stock market outside the U.S. with a broker that's also outside the U.S. Not all foreign stock markets have the same account minimums or day-trading rules as the U.S. Research other markets and see if they offer the opportunities for day-trading that fit your needs. Consult both tax and legal professionals to understand the ramifications before considering this approach.
  • Join up with a day trader firm. The structure of each firm varies, but typically you deposit an amount of capital (much less than $25,000) and they provide you with additional capital to trade, with your deposit safeguarding them from losses you may take. Otherwise, the firm simply leverages your capital.
  • Do swing trading and enter trades that you hold for longer than one day. Swing traders capture trends that play out over days or weeks rather than attempt to time a one-day trend that might last for 20 minutes. While this is less a loophole and more of a change in strategy, it works for traders who want to stay actively involved but don't yet have enough equity to meet the $25,000 requirement for day-trading.
  • Open multiple day-trading accounts with different brokers. This is a less-attractive choice but, for example, if you open two accounts you can make six day trades in a five-day period: three trades for each broker. This isn't an optimal solution because if you already have limited capital, each account is likely to be quite small and day-trading with such small accounts isn't likely to produce much income. With small amounts of capital in each account, you are severely limited in the stocks you can trade, and some brokers may not even accept the small deposit.

    Brokers are out to protect themselves and can impose minimum capital restrictions at their discretion if they believe someone is day-trading regularly (even if below the four-trade/five-day threshold) or trading in a risky manner.

    Trading a Different Market

    A better alternative to taking advantage of a loophole or adopting a different trading strategy is to change markets.

    • The forex or currencies market trades 24 hours a day during the week. Currencies trade as pairs, such as the U.S. dollar/Japanese yen (USD/JPY). With forex trading, consider starting with at least $500, but preferably more. The forex market offers leverage of perhaps 50:1 (though this varies by broker), so a $500 deposit means you can trade and earn—or lose—off of $25,000 of capital. Profits and losses can mount quickly.
    • The futures market is where you can trade stock index futures (the E-mini S&P 500, for example) and commodities (such as gold, oil, and copper). Futures are an inherently leveraged product, in that a small amount of capital, such as $400 or $500 in the case of the E-mini contract, gives you a position in a product that typically moves 10 or more points a day, where each point is worth $50. Profits and losses can pile up fast. It's recommended futures traders start with at least $2,500 (if trading a contract like the E-mini), but that will vary based on their risk tolerance and the contract(s) traded.
    • Day-trading the options market is another alternative. Options are a derivative of an underlying asset, such as a stock, so you don't need to pay the upfront cost of the asset. Instead, you pay (or receive) a premium for participating in the price movements of the underlying. The value of the option contract you hold changes over time as the price of the underlying fluctuates. What type of options you trade will determine the capital you need, but several thousand dollars can get you started.

    Almost all day traders are better off using their capital more efficiently in the forex or futures market. These markets require far less capital to get started, and even a few thousand dollars can start producing a decent income.