How Much Money Do You Need to Start Day Trading?

Many people are hesitant to get into the world of day trading because they do not know how much money they should start with. Oftentimes people massively overestimate the requirements to get involved. The amount of money you need to start day trading varies, but it’s generally recommended to have at least a few thousand dollars available for trading. You don’t need, nor should you start with, hundreds of thousands of dollars.

We’ll get more specific about capital requirements to start day trading, but first we need to address the pattern day trading (PDT) rule. PDT is a regulatory restriction that usually confuses new traders, but there are multiple strategies to work around this rule.

It is possible to start trading with a small account and find success even with limited capital. You’ll likely have to adopt different strategies and be very selective with the trades you take. Remember that the smaller your account, the less money you stand to lose in the beginning stages. As long as you aren’t trading on margin, you can only lose what you put in.

Understanding the Pattern Day Trading Rule

The pattern day trading (PDT) rule is a regulation imposed by the U.S. Securities and Exchange Commission (SEC) on traders who execute four or more day trades within a rolling five-business-day period. If your account meets the PDT criteria, meaning that you have taken more than the allowed number of trades, you must maintain a minimum balance of $25,000. Falling below this balance will result in trading restrictions, such as the inability to execute more trades until the account balance is brought back up.

A very common problem is when someone uses their last day trade, and now can not close an existing position because they are “out of trades.” Although this may seem annoying, it is a limitation you must understand. The markets do not care, the regulators do not care, your broker does not care if you get caught in a trade you can’t close. This is your responsibility to understand and avoid.

So it may seem as though to get into day trading you must have an account balance of at least $25,000. However, this is far from the truth and there are ways to effectively trade the stock market with account balances that are lower than this.

You should only ever open a trading account with money you are willing to lose. Never open a trading account with money you have saved for other financial obligations.

Strategies to Work Around the PDT Rule

Options Cash Account

One way to avoid the PDT rule is to trade options in a cash account. You’ll be trading long calls, and long puts. Unlike equities, options trading in a cash account doesn’t fall under the same regulatory requirements. Your cash will settle after a completed trade in T+1 vs T+3 with equities. This means that the following day you will have your full buying power available to trade with in a cash account using options. With equities you would be subject to waiting for the cash to settle in three days. While this approach may provide more flexibility for smaller accounts, it’s critical that you understand options trading and the risks that come with leverage.

How much money should you have to open a cash options account? Our suggestion is to have a minimum starting balance of $2,000. This will give you enough capital to take multiple trades on less expensive stocks and not be wiped out on a single trade.

Futures Margin Account

Another alternative to consider is trading futures contracts in a margin account. Futures trading is not subject to the PDT rule restrictions, allowing traders to execute multiple day trades without needing a $25,000 account balance. In a futures account your cash is available to trade again as soon as a trade is closed. The actual settlement of the trade happens daily after the close, but most brokers will credit your account the profit or loss from a trade once closed. When that happens your buying power should be replenished. Just like options you must fully understand futures markets and risk management techniques to deal with margin before trading them. For an in-depth article on futures, check out this article and explainer video: Click here.

How much money should you have to open a futures trading account? Our suggestion is to have a minimum starting balance of $5,000. This will give you enough margin cushion for drawdown if some trades don’t generate profit in the early stages of the accounts lifetime.

With the advent of micro future contracts such as the /MES you could get away with less starting capital as the margin requirements are lower, however you need to be disciplined enough to avoid trading the full size contracts that could potentially wipe out your account in one trade gone wrong.

Multiple Accounts

Maintaining multiple trading accounts is another technique to bypass the PDT rule. By distributing your trading capital across different accounts, you can continue day trading even if one account falls below the $25,000 threshold. Managing multiple accounts requires careful organization and diligent tracking of trades and account balances. This is not a clean way to avoid PDT, and most people opt for using a cash options account, or a margin futures account.

How much money should you have in each account to be effective? A minimum recommendation for each account would be $3,000. When you trade equities, you are likely using more capital per trade compared to options and futures. Balances less than $3,000 should focus on options trading. If you can open multiple $3,000 accounts, you may as well wait to open one $25,000+ account and avoid the headache of management.

Limitations of Starting with a Small Account

Starting with a small account comes with positional limitations. The number of shares or contracts you can trade will be capped at a smaller number if you are adhering to risk management principles. You won’t be able to diversify the trades you take on any given day across a number of opportunities as would a larger account. Because of this, you’ll need to be more selective in the trade setups that you take. Patience becomes a virtue. The best thing that you can do about this is turn what appears to be a “limitation” into a strength. Why wouldn’t you focus on the best trades? Your focus will be narrowed when trading a small account, reinforcing a good habit.

The emotional impact of trading markets is amplified when trading a small account. Losses and gains will make up a more significant portion of your account balance. You’ll need to develop strong emotional resilience and stick to risk management strategies that protect your capital. Only risking a small percentage of your account per trade ensures that a few losing trades won’t wipe out your entire balance.

Scaling Strategies

As your small account grows, you’ll have a decision to make. Is your goal to continue to grow it, or is your goal to pay yourself as a trader? Our recommendation is that you do a combination of both. Once you have replenished your initial capital, meaning the account has doubled, you should withdraw those profits. What this will do is immediately protect your initial investment. It will also force you to start from “scratch” and prove to yourself that the first round of growth wasn’t just luck.

On the second scale, you should still focus on paying yourself, but also allocate a percentage of your profits back into the trading account. This approach allows for organic account growth while still producing income, which at the end of the day is the whole point of trading.

Conclusion

Day trading with limited capital offers both challenges and opportunities. Understanding the PDT rule and using alternative strategies like trading options in a cash account, trading futures in a margin account, or managing multiple accounts can provide flexibility in avoiding having to start with $25,000. Small accounts have limitations but success is possible through disciplined risk management, focusing on quality setups, and using scaling strategies. Remember, regardless of your account size, continuous learning, practice, and emotional resilience are the keys to flourishing as a day trader.