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Online trading technology is so advanced that you can do just about anything from the comfort of your own home. Day trading is one of the most common trading approaches, and if you want to start, Benzinga is here to show you how.Not only this, but we’ll also cover the six most important rules you’ll need to know to give you a leg up on your day-to-day adventures with the stock market.
- Overview: Day Trading Rules
- Rule 1: You’ll Need to Abide by the Pattern Day Trader Rule
- Rule 2: Day Trading Accounts Operate on Margin
- Rule 3: Day Traders are Subject to Specific Requirements
- Rule 4: Don’t Trade with Money You Cannot Afford to Lose
- Rule 5: Be Familiar with the Risks
- Rule 6: Aim for Steady Growth
- Best Online Brokers for Day Trading
- Best Stocks of the Day
- Final Thoughts
Overview: Day Trading Rules
Day trading is a high-risk trading style in which you purchase and sell financial securities on the same day. Unlike standard investors who buy and own financial assets for lengthy periods, day traders speculate on the price of financial assets without actually owning them. Since trades are open and closed intraday, they aim for small price moves.
These moves will not make much of a change to your bankroll if you trade with your own funds, so day traders rely on borrowed money (trading on margin) to conduct trades. Though highly speculative, margin trading allows traders who don’t have the obligatory cash on hand to day trade.
Rule 1: You’ll Need to Abide by the Pattern Day Trader Rule
You’re considered a pattern day trader by the Financial Industry Regulatory Authority (FINRA) if you execute four or more trades in a five-day period. Pattern day traders must have 6% of these trades in the same margin account for that same five-day period.
Certain day trading brokers might have different requirements to qualify you as a pattern day trader. Contact your agency to determine the exact rules for pattern day trading before opening an account.
Example: You participate in a broker’s day trading courses for pattern day trading and the broker can give you an account to complete your training. Pattern day traders must maintain a minimum account equity of $25,000 and are always bound by margin.
Rule 2: Day Trading Accounts Operate on Margin
Margin means you not only leverage your own funds but with extra funds that you borrow from your broker.
These funds offer you greater buying power, and you can aim for more significant returns. However, the inherent risk involved in margin trading means that one bad trade can result in a severe loss of your own funds. For example:
- You have a $225,000 account for live day trading
- You trade on margin with a leverage of 4:1
- You can trade with only $200,000 in order to comply with equity requirements
- 4 x $200,000 = $800,000 total buying power
- Your strategy puts 20% of your buying power in a single trade = $160,000 per trade
If the price of your financial asset goes against you with 5%, you will lose real money equal to:
- $160,000 * 0.05 = $8,000
- This is an $8,000 loss from a single trade. So, what is the maximum negative move you can handle?
- $160,000 * X = $200,000
- X = 200,000 / 160,000 = 1.25 or 125%
- Since financial assets cannot lose more than 100% of their value, you cannot lose all your funds with this strategy. However, you can still lose the investment in the trade, which is 80% of the $200,000.
If you are not able to meet your broker’s requirements financially, you will get a margin call. Your broker will alert you to provide more funds, or your trades will be instantly closed on a loss.
It’s important to follow strict money management rules to avoid such a scenario. You can always limit your risk with a stop-loss order. If you limit your losses to 1% per trade, it’ll take 100 losing trades to fully wipe out your account. Let’s do some math again.
- You have $200,000 available for trading. One percent risk per trade is $200,000 * 0.01 = $2,000
- You want to limit your loss to a maximum of $2,000 per trade. Thus, we need to calculate how much $2,000 is from the amount you invest in a single trade ($160,000)
- 2,000 / 160,000 = 0.0125, or 1.25%
- With the above conditions, your stop-loss order should be at a distance of 1.25%. If a stock trades at $250 per share, your stop-loss should be at a distance of $250 * 0.0125 = $3.13
Rule 3: Day Traders are Subject to Specific Requirements
According to FINRA, a day trader will be subject to the following requirements:
Your equity is your absolute account value, including any profit or loss from open trade. A day trader needs to make a minimum deposit of $25,000 and maintain a minimum equity of $25,000 all the time.
The minimum equity can contain both cash and securities. Note that your broker can always impose higher equity requirements.
You can trade up to four times more on the maintenance margin excess. Your brokerage firm can apply changes to this rule.
Your buying power is the maintenance margin excess times the margin you are using. If your excess is $50,000, then your buying power will equal $50,000 * 4 = $200,000.
You get a margin call when you are unable to meet your account requirements. This could be fatal for your account as your trades can get closed on loss if you don’t comply. You will get a margin call if you exceed your buying power limitation. Then you will have up to five business days to deposit funds to meet the requirement.
Rule 4: Don’t Trade with Money You Cannot Afford to Lose
Avoid putting your savings or your child’s college fund into day trading activity. Your funds should be explicitly assigned for trading.
Rule 5: Be Familiar with the Risks
Three different risks related to trading:
You Can Lose Everything on a Single Trade
Successful day traders have many losing trades in addition to winning trades. Therefore, every trade needs to have a stop-loss order or security to limit your potential loss for every trade.
You need to know how much you will lose and what you will have in case the market runs against you.
If you’re a day trader, bankruptcy is a non-remote possibility, which will cost you all the money in your trading account and could saddle you with extra debt. Make sure you stay familiar with the trading conditions of your broker and the eventual outcomes in case you fail.
Broker Financial Failure Risk
What happens if your trading provider fails to meet its financial obligations and goes out of business? Some reputable companies guarantee you a certain amount of money in case they go out of business.
Rule 6: Aim for Steady Growth
Many beginner traders believe they will profit big-time right away, maybe popularized by the Hollywood movies we watch every day. But, in reality, most traders are out of business not long after they begin day trading.
Your goal is to grow on a consistent basis, and a successful amount could even be 2% per month.
Example: Imagine you have a $100,000 account and you grow it by 2% every month. At the end of the year, you would have $124,337. (Most investments will not return a 24.34% yearly interest.)
Best Online Brokers for Day Trading
Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.
Webull is widely considered one of the best Robinhood alternatives.
- Active traders
- Intermediate traders
- Advanced traders
- No account maintenance fees or software platform fees
- No charges to open and maintain an account
- Intuitive trading platform with technical and fundamental analysis tools
- Does not support trading in mutual funds, bonds or OTC stocks
SoFi’s mission is simple: to help reach clients like you reach their financial independence and realize their ambitions. SoFi knows that this independence comes from making decisions that help your money start to work for you in the long run. The brand helps individuals make these decisions through personal financial products such as personal loans, student loans and automated and active investing.
The brand additionally provides in-person experiences such as educational and networking events, personalized guidance from experienced financial planners and one-on-one advising with professional career coaches. SoFi’s services have been highlighted in outlets such as Forbes, Medium, and CNBC’s Make It.
- IPO Investing
- Mobile Investing
- U.S.-based customer service
- Highly-rated mobile app for iPhone and Android
- Only available in the U.S.
Moomoo is a commission-free mobile trading app available on Apple, Google and Windows devices. A subsidiary of Futu Holdings Ltd., it’s backed by venture capital affiliates of Matrix, Sequoia, and Tencent (NASDAQ: FUTU). Securities offered by Futu Inc., regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Moomoo is another great alternative for Robinhood. This is an outstanding trading platform if you want to dive deep into smart trading. It offers impressive trading tools and opportunities for both new and advanced traders, including advanced charting, pre and post-market trading, international trading, research and analysis tools, and most popular of all, free Level 2 quotes.
Get started right away by downloading Moomoo to your phone, tablet or another mobile device.
- Cost-conscious traders
- Active and Advanced traders
- Over 8,000 different stocks that can be sold short
- Access trading and quotes in pre-market (4 a.m. to 9:30 a.m. ET) and post-market hours (4 p.m. to 8 p.m. ET)
- No minimum deposit to open an account.
- No chat support
It seems like new digital investment management platforms are sprouting up left and right, and for good reason — there’s a great need for easy, straightforward investment management that doesn’t cost an arm and a leg in fees or to get started. If you’re new to investing or an old hat who wants to make the switch to a virtual manager, deciding which features you need can be confusing if not overwhelming.
If you want a no-frills financial management platform, Axos Invest (formerly WiseBanyan) takes a traditional but sophisticated approach to automated online investing.
- Traditional investors trying out an automated investor for the first time
- New investors that want to take a hands-off approach to portfolio management
- Straightforward automated investing
- Relatively low account minimum and automated investing fee
- A solid roster of available investment account types
- Not a stand-out from other services if you’re someone who likes all the bells and whistles with your digital financial platform
- No direct relationship with a human financial advisor
This latest groundbreaking technology is IBKR GlobalAnalyst, a new trading tool that helps investors compare the rate of PEG or price-earnings growth valuations and provide more immediate and comprehensive financial metrics of stocks, globally.
Recognizing that stock selection can be challenging for investors to compare the valuations of domestic and international stocks, Interactive Brokers created GlobalAnalyst to offer investors a simple, yet powerful tool to easily evaluate investment opportunities around the world.
Using GlobalAnalyst, investors can search for stocks by region, country, industry, market capitalization and currency to uncover undervalued stocks worldwide. The resulting table displays the current market and financial metrics, including the PEG Ratio. The PEG Ratio is the PE ratio divided by the three-year compound earnings growth rate, and smaller PEG Ratios typically indicate undervalued companies.
- Price earnings growth valuations
- Easily evaluate investment opportunities
eToro is a broker that offers access to over 25 of the world’s most popular cryptocurrencies, forex and over 1600 stocks. They have a few unique education and useability tools. Traders can begin buying and selling in as little as 10 minutes.
eToro’s unique CopyTrader feature allows new investors to “copy” the buy and sell orders of professional investors, while the company’s eToro Club feature provides investors with a range of additional education tools and resources.
- Traders looking for an easy-to-use platform
- Traders who want to practice their trades using a virtual account before entering the market
- Simple platform that is easy to master
- CopyTrader feature that allows new traders to copy the same strategies used by professionals
- Virtual dummy account that gives you $100,000 to practice trades
- High non-trading fees
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More than 80% of day traders aren’t successful, and it’s easy to see why. Clearly, day trading comes with a harrowing set of rules and requirements, but meeting these requirements is not enough to be a successful day trader.
You’ll first need to build a working trading strategy and then apply proper money management rules. Take into consideration minimum equity requirements, margin, buying power and the amount you use in one trade.
Want to learn more? Check out Benzinga’s guides to the best day trading brokers, best day trading software and best day trading books. Also, if you’re just getting into day trading, learn how to day trade with only $100.