Day Trading Requirements for Stocks, Forex and Futures
“How much capital do I need to start day trading?” is one of the mostly frequently asked questions I receive from people who want to start
day trading stocks, forex of futures.
How much money (capital) you need depends on the style of trading that you wish to do, where you trade, and also the market you trade (stocks, forex or futures).
Day Trading Requirements in US and Abroad for Stock Traders
To day trade stocks in the U.S. you’ll need to maintain an account balance of $25, 000. You should start with at least $30,000 (but likely more) if you plan to make more than 4 day trades per trading week (more than 4 day trades per week gives you day trader status and you’re subject to the $25,000 minimum account balance). If you’re account drops below $25,000 you won’t be able to continue day trading until you replenish your account to more than $25,000.
You can day trade other global markets without this account minimum. You should open a day trading account with at least $10,000 if you are short-term trading outside the US (each exchange may have different requirements). With smaller accounts than this, fees can become a very large obstacle to overcome.
While these minimums are in place to enter the market (regulation in US, guidelines in most other markets), it’s important to remember that one of the common errors traders make before even starting to trade is being under capitalized. Keep in mind that losses do occur, so you need to account for that. After taking losses you still need to have enough money to keep trading.
I recommend only ever risking–at most–1% of your capital on a trade. Your risk is defined as the difference in price between your entry price and and your stop loss level, multiplied by the number of shares of have. For example, you buy a stock at $10, place a stop-loss at $9.75 and take 500 shares (position size). Your risk is $0.25 x 500 = $125. To make trades like this you need $12,500, as $125 is 1% of the account ($12,500). In the US you need $25,000 but in other markets you may be able to get away with less, as the example shows.
For more on stock trading requirements in the US, read this pamphlet from the SEC: http://www.sec.gov/investor/alerts/daytrading.pdf. Here are the main points in the pamphlet:
Minimum Equity Requirement: The minimum equity requirement for a customer who is a pattern day trader is $25,000 [four day trades per week]. This $25,000 requirement must be deposited into the customer’s account prior to any day trading activities and must be maintained at all times. A customer cannot fulfill this $25,000 requirement by cross-guaranteeing separate accounts. Each day trading account is required to meet the $25,000 requirement independently, using only the financial resources available in that account.
If a customer’s account falls below the $25,000 requirement, the customer will not be permitted to day trade until the customer deposits cash or securities into the account to restore the account to the $25,000 minimum equity level.
Day Trading Buying Power: A customer who is designated as a pattern day trader may trade up to four times the customer’s maintenance margin excess as of the close of business of the previous day for equity securities. If a customer exceeds this day trading buying power limitation, the customer’s broker-dealer will issue a day trading margin call. The customer has five business days to meet his or her margin call, during which the customer’s day trading buying power is restricted to two times the customer’s maintenance margin excess based on the customer’s daily total trading commitment for equity securities. If the customer does not meet the margin call by the fifth business day, the day trading account will be restricted to trading only on a cash available basis for 90 days or until the call is met.
In the U.S. day traders can leverage their stock market day trading capital up to 4:1, so a $30,000 account actually allows the day trader to hold up to $120,000 in day trading positions.
How much money do I need to day trade Forex?
In the forex market, accounts to be opened for smaller amounts of money. Forex provides leverage up to 50:1 (higher in some countries). Increased leverage means increased risk…and reward. Discipline is always paramount in trading. To determine how much leverage you need see: How Much Forex Leverage.
The Foreign Exchange (Forex) market is based on the simultaneous buying of one currency and the selling of another. Currencies are available for trade 24 hours a day, 5 days a week. Being that the currency market is the largest market in world, with daily volume of $5 trillion being bought and sold, the liquidity makes it an attractive day trading alternative.
Accounts can be opened for as little as $100, but you’ll want to start with at least $500 in order to be able to place trades with decent stop loss levels.
With that amount of money you aren’t going to make a living from the markets. You may make a few dollars a day, which will grow your account over time though. There is a lot of opportunity in forex, but if you go in under capitalized you likely won’t make it. Start with at least $1000, and preferably $3000 to $5000. Opening an account with $3000 to $5000 allows you start building a secondary (or primary) monthly income, which is what most day traders are after. For more, see How Much Money Do I Need to Trade Forex?
How much money do I need to day trade Futures?
Futures contracts are a popular day trading market because futures day traders don’t need to maintain the $25,000 account minimum that is required of US stock day traders.
To day trade futures most brokers only require a minimum deposit of $1000. In order to day trade an E-mini S&P 500 (ES) futures contract–one of the popular futures contracts for day trading–most brokers require you have at least $400 or $500 of available capital in your account to take a one contract trade–this is called day trading Margin.
Opening an account for only $1000 isn’t recommended.
Open an account with at least $3,500, and preferably $7,000, if trading ES futures. For other contracts your broker may require more available capital/margin, so you may wish to start day trading with at least $10,000.
Using a risk-controlled strategy you can start to build a secondary (or primary) income off of $3,500. That is the minimum you ideally want to trade with though (so you can keep each trade below 2% risk), therefore depositing more than that is recommended.
How much money do I need to become a day trader? — Final Thoughts
Day trading stocks is capital intensive, as you’ll need to maintain at least a $25,000 account balance. Make sure to have enough capital before commencing day trading. Being under-capitalized is a big mistake as a few losing trades can cripple a trader, making it hard to win the capital back and thus creating a downward spiral.
Forex provides a less capital intensive way to day trade.While the capital requirement is far less trading forex, traders still should not start trading unless they have enough capital to do so. Starting with $1,000 or more is recommended, $3000 or more is preferable.
For futures trading, if you trade a contract like ES, start with an absolute minimum of $3,500. Ideally you should start with $5000 or more, and depending on which contract you trade this could be much higher since each contract has different margin requirements.
Work out a strategy and make sure you can handle a string of losses. Only when enough capital is available to sustain a string of losses, and a strategy is outlined (in detail), should a real money account be opened (see How to Day Trade Stocks in 2 Hours or Less).
Trading takes time to learn. If you are going to day trade trade full-time (no other source of income) you should budget for at least 6 months to a year to learn how to trade consistently. This is an additional cost to funding your account. Therefore, you will need more money than just what you put in your account. Don’t expect your day trading to start paying off immediately or consistently. Money and consistency take time, so have AT LEAST 9-12 months or more of savings to pay your bills.
By Cory Mitchell, CMT
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