One of the most common questions new day traders ask is how much money it takes to start day trading. There’s no exact answer to this question, but there are some guidelines that traders can follow to make it easier to get started. We’ll explain the minimum and ideal amounts to start day trading and look at why having a little extra capital on hand can make day trading much simpler.
What is Day Trading?
Day trading involves buying and selling stocks or other assets within the span of a single trading day. In contrast to investors, day traders rarely hold positions overnight. They also trade solely based on technical price patterns, not based on any fundamental qualities of the companies whose stocks they are trading.
Importantly, day traders who use margin accounts are subject to the Pattern Day Trader (PDT) rule. This rule is triggered when a trader executes four or more day trades within a five-day period.
Once the PDT rule is triggered, traders must maintain a balance of at least $25,000 in their account to continue day trading. If your balance falls below $25,000, you will not be able to execute day trades until you bring your account balance back above that threshold.
How Much Money Do You Need to Start Day Trading?
There’s no exact answer to the question of how much money you need to start day trading. However, we suggest $3,000 as a minimum for most new traders.
The reason is that it’s hard to make enough money to sustain day trading as a part-time or full-time hobby with less money. Most day traders will earn at most a few percentage points per trade. After accounting for losses – not every trade is going to be a winner – let’s say you end the day with a net gain of 5%. With $3,000 in your account, that equates to $150 in profit.
If you perform that well that every trading day for a month, you’ll earn around $3,000 (not accounting for daily compounding). Many traders would consider doubling your money in a month something that only happens when you’re red hot. Still, with a $3,000 account, a once-in-a-lifetime month of trading only netted you $3,000. It’s not exactly a life-changing amount of money, and won’t provide much of a cushion when you have a month of trading that goes against you.
With less than $3,000 to trade, day trading even as a part-time occupation simply isn’t financially feasible for most traders. If you have an average month in which you net 2% per day, you’ll only earn $1,200. If you only have $1,000 to trade, that sum drops to just $400 for a month of difficult and time-consuming effort.
It’s important to note that if you’re trading with $3,000, you’ll be subject to the PDT rule. There are a few ways around this, including using a cash account instead of a margin account. However, cash accounts can be problematic because trades need to fully settle before you can use your capital to trade again.
A more ideal amount of capital to start trading with is $30,000. This is enough to leave you some padding to clear the PDT rule’s $25,000 threshold even if you take a few losses. As a result, you can trade in a margin account and access significantly more capital for your trades.
You’re probably not going to want to commit your entire account to one trade, but having $30,000 and access to margin means that you can open multiple trades at the same time. This can be very powerful if you want to use a combination of very short-term and day-long trading strategies or even combine day and swing trading strategies.
With $30,000, you also don’t have to worry about whether trading is financially worthwhile. If you double your money in a month, as in the example above, that’s $30,000 you earned in the span of a few weeks. Even at a more modest 2% average profit for the month, you’ll earn around $12,000.
When deciding how much capital you need to start trading, there are a few additional things to consider.
First, never trade with money you can’t afford to lose. Even the best traders will tell you that losing is a part of trading – it’s going to happen, and you’ll only hurt yourself by pretending that it won’t. If you trade with $3,000, that means you should be financially stable even if all of that money disappears tomorrow.
If you’re trading with less than $25,000, you’ll need to make a choice between trading in a cash account and avoiding the PDT rule altogether or trading in a margin account and planning around it. The problem with using a cash account is that trades take three days to settle. In the meantime, you can’t use the unsettled funds to trade. In a margin account, your broker essentially lends you money equal to your unsettled funds at no cost so that you can keep trading as soon as you close a position.
If you choose a margin account, it’s important that you not trigger the PDT rule. Consider trading every other day or only a few days a week. Pick and choose your trades carefully to prioritize the best setups. You can also open multiple margin accounts and spread your funds across them. This makes managing trades more difficult, but can allow you to trade more frequently without triggering the PDT rule.
Finally, consider whether other trading styles make more sense for you than day trading. Swing trading is often a better option for traders with small accounts because there’s little risk of triggering the PDT rule. In addition, the profit target on an individual swing trade may be three to five times the profit target of a day trade. So, your potential profit from deploying a $3,000 account may be greater with this type of trading.
Conclusion: How Much Money Do You Need to Start Day Trading?
While you can start day trading with any amount of money, we recommend $3,000 as a minimum for most traders. Trading with less than this amount makes it difficult to financially justify the time and effort required to day trade. The ideal amount to trade with is around $30,000, since this is enough to mitigate the PDT rule and offers a significant reward for successful trades.