The SEC has strict rules in place concerning who can day trade stocks and securities on the marketplace. Day traders who intend to take advantage of daily fluctuations in the market should have at least $25,000 in their account and must carry the pattern day trader status with margin accounts. But what if you want to dip your toe into day trading without having a margin account? Here are a few tips available to you.
Only Place Three Trades Per Week
The very nature of day trading seems against this idea, but it’s perfectly possible to do four intraday trades, and your broker will not mark your account as a pattern day trader. Some online brokers like Robinhood have built-in protection that stops you from making trades once you’ve hit your limit for that week. While this is counter-intuitive to the day trader making tons of little plays, if you do your due diligence before you begin you can still reliably ride the ups and downs of the market.
Trading with Multiple Brokerages
Since you can trade only four times at each brokerage before your account is flagged as a pattern day trader, splitting up your investment money between multiple brokerages helps you avoid this restriction. It’s a convoluted way to day trade, and we don’t recommend it to anyone since you’ll experience different fees on your trades, but it is possible to split your trades across accounts so you can make up to 12 trades per week and still not activate the pattern day trader categorization for any of your accounts.
Trading with Only Your Cash
If you have $100,000 you’re looking to trade, it can be tempting to accept the maximum margin account amount allowed by the SEC, which is $400,000. Most newbie traders see the additional capital and think of all the money they could earn by blowing through it without thinking of the consequences of too many days in the red. If you only trade the cash value of what you have and not a penny in the margin account, you are less likely to let yourself go on a run that puts you in the red day after day. This principle prevents you from bleeding money that you’ll owe and helps you break out of a boom-bust cycle by trading your funds much more carefully than you might if you were trading the maximum amount allowed by a margin account.
Margin-Free Day Trading is Less Stressful
It’s tempting to view your margin account as free money that can be traded to make yourself extra money, but you should realize that brokerage firms are not giving you this money for free. They charge an interest rate the same as credit card companies charge for borrowed money and you are paying this each time you trade with your margin account. Typical margin account interest rates vary between 1.5% and up to 9.0% depending on several factors. If you’re unsure if your brokerage account is charging you a margin account interest rate, read the fine print associated with your account type or talk to one of their financial advisors to clear up the confusion.
Day Trading Outside the US on Foreign Exchanges
It’s also important to note that the US-based SEC rules do not apply to foreign stock markets. Every country has different rules for its markets based on account minimums or day trading. Speak with a legal or tax professional to determine whether this approach is right for you.
