The Minimum Capital Required to Start Day Trading Stocks
To be a day trader of stocks, you need capital. The stock market has a legal minimum capital requirement to day trade, but there is also a recommended minimum which may vary by the individual trading style. Traders need to have enough capital to withstand a string of losses and have the flexibility to take a wide array of trades which present various risks.
Risk Management and Day Trading Capital Requirements
In order to determine the amount of capital needed, risk management must be addressed. Day traders shouldn't risk more than one percent of their account on any single trade. If trading a $40,000 account, that means the maximum loss a trader should take is $400 on any given trade.
Capital is the day trader's lifeline. Capital must be preserved during losing streaks, which inevitably occur. By only risking one percent, even a ten trade losing streak keeps most of the capital intact.
Risk is determined by the difference between your entry price and your stop-loss order, multiplied by the position size. The next section looks at some examples.
Minimum Capital Required to Start Day Trading Stocks
For day traders in the U.S., the legal minimum balance required to day trade stocks is $25,000. If the balance drops below this, day trading isn't allowed until a deposit is made bringing the balance above $25,000. To allow a buffer, day traders in the U.S. should have at least $30,000 in their account if they wish to day trade stocks. On $30,000, no more than $300 should be risked on any one trade.
Stocks typically trade in 100 share lots and move in $0.01 increments. With $30,000 there is some flexibility; trade volatile stocks (may require a larger stop loss) and still keep risk below $300 with a small position size, or trade less volatile stocks (smaller stop loss) and take larger position sizes.
If you buy a stock at $40 and place a stop-loss at $39.70. Risk is $0.30 on the trade. If your position is 1000 shares, your position risk is 1000 x $0.30 = $300.
This position risk must be less than one percent of the day trading account balance. To see if it is, divide $300 by 0.01, to get $30,000. To make this trade, your day trading account balance must be $30,000, or greater.
If trading very volatile stocks you may need to risk $1 per share (the difference between the entry and stop-loss price). In this case, it will only take 300 shares, which is the maximum risk on the $30,000 account. (300 shares x $1 = $300)
If trading a low volatility stock, you may need a risk of $0.05 per share (the difference between entry and stop-loss price). In this case you can take $300 / $0.05 = 6000 shares. We just divided the maximum risk by the risk on the trade to get the position size.
Math like this should be done on every trade, making sure that each trade is one percent or less of the current account balance.
Day Trading Capital and Leverage
Day traders can typically access leverage up to 4:1 on their capital. If there is $30,000 in the account, up to $120,000 worth of stock can be traded at any given time ($30,000 x 4).
That means position size multiplied by the trade price can equal more than the day trading account balance. Notice that the first example above requires $40,000 in buying power to attain (1000 x $40), yet the trader only has $30,000 in the account. It is the power of leverage.
Even when leverage is used, the one percent risk rule is always applied to actual account balance ($30,000 in this case).
Capital Required to Start Day Trading Stocks
It's recommended that day traders start with at least $30,000, even though the legal minimum is $25,000. It will allow for losing trades and more flexibility in the stocks that are traded. Day traders can trade more volatile securities, which will often require a larger stop loss but a smaller position size, or trade less volatile stocks with smaller stop loss but a larger position size. Total risk on a single trade should not exceed one percent of the day trading account balance.