How Much Money Do You Need to Get Started in Day Trading – Whiteboard Wednesday

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It is a question most of us asked ourselves when we first got started in day trading, “How much money do I need to get started in day trading?”

Fortunately for most individuals, the answer is not a lot. But starting with the absolute minimum might not be the best route to take. Let us explain.

How much money you need to get started in day trading will depend highly on the broker you chose to trade with. Some brokers will allow you to trade with as little as $500 but will require at least $2,000 for you to open a margin account (required if you want to short sell stocks).

The problem with well known and popular retail brokers such as Scottrade, TD Ameritrade, E-Trade, etc.. is that their per trade commissions are very high. This will make it tougher for you to succeed in the beginning as their higher commissions will eat into your trading gains. For simplicity’s sake, let’s say each round-trip costs you $20 ( $10 when you buy $10 when you sell).That means if you purchase 100 shares of a stock you will need at least 20c move to break even on the trade. If you trade on lower shares you will need even more of a move to break even. In day trading, the game is all about consistent small to medium gains while managing risk. Sure we all love home runs but reality is most day traders average about 30 to 50c gain on each trade. Therefore every penny you save on broker commissions is money that goes directly to your pocket. Lets take a look at how important commissions are.

Lets say you buy 100 shares of a stock and in 2 minutes the stock goes .50 cents in your favor immediately and you take your quick gains. Congrats, you just made a cool $50. The math looks like this :

.50 x 100 shares = $50

Now you owe your broker $20 just for the trade

commissions $20
Profit before taxes = $30

Other brokers, like Interactive Brokers, have cheaper commissions but have an account minimum of $10,000. With interactive Brokers on this trade your commissions would be $2 ( $1 to buy then $1 to sell ) so the math with Interactive Brokers looks like this

.50 x 100 shares = $50

Commissions to Interactive Brokers $2

commissions $2
Profit before taxes = $48

Under these commissions you walk away with 65% more profit. Same trade but more money for you. Now add 3 to 4 trades a day ( how many trades an average day trader takes) and you can see how important this is. In some cases having the right broker can save you over $50,000. Its a big deal

$25,000 and the Pattern Day Trader Rule

$25,000 is the minimum you need to trade in the U.S. without account restrictions. This is known as the Pattern Day Trader Rule and requires anyone executing 4 or more roundtrips (day trades) in 5 business days to have an account minimum of $25,000. Anything less than that, don’t expect your account to grow overnight. It takes time, patience and a whole lot of discipline to grow your account if you don’t have the $25,000. If you do break the Pattern Day Trade Rule, expect your account to be frozen for 90 days or until you pony up enough money to have $25,000. During the time your account is on lock-down you will only be allowed to exit positions but not initiate new ones.

Avoiding the Pattern Day Trade Rule

There are ways to avoid the Pattern Day Trade Rule. First, there are multiple offshore accounts that require low account minimums ) $1000 to $4,000) in addition to 6 to 1 margin. I personally traded with one for a couple of years until I switched to IB. While I was able to avoid the PDT rule, the fees to transfer money in and out were expensive not to mention back end account fees were steep . Because of that I saw no reason to stick around. But my biggest fear was always the fear of the SEC freezing the brokers assets and me not being able to wire my money out. I’ve seen it happen before and it is something that scared me to death.

The other option and a more viable one is to go with a Hedge Fund like Clique Fund, which The Lincoln List is affiliated with. There, you can get up and running with a couple of thousand dollars but you will enjoy super low commissions ( as low as 0.00027c a share) on your trades, a great borrow list, and if you prove you are consistent, access to a lot more capital. Plus, you get on going training and support from professional traders.

Trading with a Hedge Fund like Clique can benefit just about anyone because with Firms like this risk controls are tighter and your accounts are monitored closely. This is mainly because you are trading on the Firms money not yours. However, these risk control policies keep the trader on a strict disciplined trading program that helps them succeed for the long term.Something, that retail brokers do not provide you with) We’ve heard great things from our members who trade via Clique and it is hard to believe their super low commissions. You just have to remember that you are trading someone else’s money and so you will have an account with more restrictions.

Here is a quick video on average balances to fund your account with and how to avoid the PDT rule

Regardless of the path you chose the most important thing you can do to increase your chances of survival is training. It makes no sense to put your money you worked so hard to save up at risk in the markets on little knowledge. Make sure you take a small piece of your balance and get educated. Our day trading bootcamp, is very affordable and can be paid for in payments. While you study, you can also save up and come to the market prepared and with a bigger account size.