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Capital Requirements

Capital Requirements for Day Trading

 

"How much capital do I need to have?" is one of the most frequently asked questions. The business of trading depends on sufficient amount of money deposited into the trading account, in order to be able to trade profitably. There a few factors to consider and they vary based on rules and regulation, your own requirements, strategy and goals. Let's first look at the legal side of this question.

Rules and Regulations

The NASD, National Association of Securities Dealers, has recently filed with the SEC, Securities and Exchange Commission, to change the rules of margin and trading for traders. These new rules have changed the capital requirements for day trading.

(1) A "pattern day trader" is defined as any customer who (a) the firm knows or has a reasonable basis to believe will engage in pattern day trading, or (b) day trades four or more times in five business days, unless his or her day-trading activities do not exceed 6% of his or her total trading activity for that time period;
(2) Require minimum equity of $25,000 to be in an account on any day in which the customer day trades. Funds deposited into a day trader’s account to meet the minimum equity requirement would have to remain in the account for a minimum of two business days following the close of business on any day the deposit was required;
(3) Permit day-trading buying power of up to four times maintenance margin excess;
(4) Impose a day-trading margin call on any customer who exceeds his or her day-trading buying power and limit the customer to two times maintenance margin excess based on daily total trading commitment until the call is met. If the call is not met by the fifth business day, the day trader would be limited to trading on a cash available basis for 90 days or until the call is met;
(5) Prohibit the use of cross-guarantees to meet day-trading minimum equity requirements or day-trading margin calls; and
(6) Revise the current interpretation that requires the sale and repurchase on the same day of a position held from the previous day to be treated as a day trade. Instead, the sale of the position would be treated as a liquidation of the existing position and the subsequent repurchase as the establishment of a new position not subject to the rules affecting day trades.

These new rules define what a "pattern day trader" is. If you are a pattern day trader, you must have at least $25,000.00 in your account to day trade. It also allows you to use four times margin, which means that a $25,000.00 account can trade $100,000.00 worth of stock during the day. These new rules raise the bar on capital required to be a day trader, but also make it easier to day trade by raising the margin. If you don't meet these requirements, you should swing trade till you meet them.

Your capital requirement also depends on your trading strategy. Some traders require very large positions in order to follow their trading system, their trading strategy. For example, if your trading strategy requires large positions in order to take advantage of small profits, you need a much larger account. 5000 shares of a 50 dollar stock for a profit of 5 cents requires $250,000.00. If you are looking to take many positions at the same time, you will need a larger account as well. 5 positions of 2000 shares of 20 dollar stocks will also require $200,000.00. You must have enough trading capital in your account to be able to implement your trading strategy.

For more information on this rule, please visit the website Pattern Day Trader Rule

Your Goals

If you are planning on making a living trading your account, you should put together your plan, your strategy. For example, if you need $10,000.00 a month in income, that is $500.00 per day of day trading. If you are able to generate 1% return on your account per day when you day trade, that means that you need $50,000.00 of trading capital in your account. Of course, if you need more income or are not able to generate an average of 1% per day, you will need more capital.

What Makes Sense

Trading is a high risk business venture. There is a chance for you to lose money here. It is always wise to only trade with a small percentage of your over all portfolio, not all of your life savings. Most traders keep a minimum amount in their trading account and regularly sweep their profits into a large conservative account. With today's rule of four times margin, you need less capital in your trading account, which allows for more capital in your conservative portfolio. A person with $250,000.00 will have $25,000.00 in their trading account and $225,000.00 in other more conservative assets. Make sure that your trading account grows with you. If you are a beginner trader, keep your account to a minimum and trade minimum size in your positions. The account will grow slowly as your confidence in your trading grows. For most people, $25,000.00-$50,000.00 in their trading account, which gives them $100,000.00-$200,000.00 in buying power, is more than enough to trade profitably. As a trader, you should be able to generate between 1% to 5% on your account per day, which a respectable amount.

Brokerage Options

We suggest you use the direct access online broker Real Fast Trader

 

 

We suggest you use the DAS Trader PRO software offered by Real Fast Trader
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