As with kicking off any career, there are plenty of things you should learn if you have dubbed yourself a brand-new day trader.
Not only will you need to decide what to trade, when to trade, how to manage your risk, but you’ll have to get the right software and equipment, and of course, determine how many day trades you can make in your brokerage account.
In this detailed guide, we will go over how many day trades you can make in a week depending on what type of account you have.
What is a Day Trade?
A day trade is when you buy or short a financial instrument and then sell or cover the same instrument in the same day with the goal of making a profit.
For example, if you buy 100 shares of XYZ stock at 9 am and sell all the shares at 1 pm on the same day, you have completed a day trade. Just opening, without closing that position that same day, would not be considered a day trade.
Another day trade example is when you open a position to purchase 200 shares of XYZ stock at 9:30 am, followed by a purchase of another 200 XYZ shares at 2:30 pm, followed by a sale of 400 XYZ shares at 4 pm.
In addition, if you short sell 150 shares of XYZ stock at 9:30 am and then open a buy position to cover 150 shares of XYZ stock at 10:30 pm, you will have made another day trade.
Individuals who indulge in this style of speculative trading are known as day traders. The most common day traded financial instruments are stocks, futures, and forex.
Day traders typically make use of technical analysis tools and a trading strategy to try and profit off within a short period of time and will often take advantage of portfolio margin to boost their buying power.
Successful day traders don’t just trade any stock they come across. They have to be fully prepared with a well-planned strategy and employ a wide variety of techniques.
Cash Accounts and Margin Accounts
The difference between a margin account and cash account is that the margin account lets you borrow from your broker while the cash account does not.
In other words, when you open a cash account with a broker, you will be required to pay in full for the securities you buy for your account. If you have $200, you can only buy $200 worth of securities, and can’t use the securities in your account as collateral to borrow more money.
On the other hand, if you open a margin account, you can borrow money from the broker to buy securities, using those securities as collateral for the loan. Generally, when applying for this type of account, the process has to be approved by the broker to make sure you are qualified for the account.
Margin accounts also come with special features for active traders, like short selling.
Now that your understand the difference between the two accounts, let’s dig deeper to find out how many day trades you can take in a week in a cash account and how many you can take in a margin account if you are under $25,000 and if you are over.
How many day trades you can take in a week in a cash account?
One of the main benefits of day trading using a cash account is you can place as many day trades as you would like until you cash is used and won’t be held to the pattern day trading rules in a margin account.
But you will have to wait for your trades to settle before you can proceed to use that cash again. Typically, it takes one day from the trade date for options and two days from the trade date for stocks.
Example: If you have $10,000 in your cash account and you buy and sell $2,000 worth of stock, then you have $8,000 left to day trade until the $2,000 you used settles in two business days.
Cash accounts don’t follow the dreaded Pattern Day Trader Rule (PDT) rule that may prevent traders with less than $25,000 equity in their accounts from executing 4 day trades or more in a 5 day period. This is a huge benefit for traders who don’t have the extra $25,000 lying around.
The PDT rule was implemented back in 2001 by Financial Industry Regulatory Authority (FINRA) as a safety measure to help minimize the risks associated with day trading.
How many day trades can take in a margin account if you are over $25k?
When trading on a margin account, you will be subject to the pattern day trading rule, meaning you will be required to maintain a minimum of $25,000 in equity in your account if you place more than 4 intraday roundtrip trades in any rolling five-day period.
If your account is labeled as a pattern day trader, you will have to maintain that account minimum and if you don’t, you will not be able to day trade.
If you do have the minimum equity requirement in your margin account, you will be given day trading buying power which is 4x more than normal amount.
So, if you have $26,000 in your margin account, for example, you can trade up to $104,000 per day as long as you maintain the $25,000 minimum margin amount.
Keep in mind that day trading buying power can not be held overnight.
How many day trades can take in a margin account if you are under $25k?
If you have less than $25,000 in your margin account to day trade, you can get around the PDT rule by making only three day trades in a five-day period. But this means you’ll need to pick a stock from several valid trade signals, so you are not going to receive the full benefit of a proven strategy.
Essentially, if you have a $5,000 account, you can execute three-day trades in any 5 consecutive trading days. Once the account value surpasses $25,000, you will not be affected by the PDT restriction.
If you really want to take full advantage of day trading stocks in a margin account, make sure to save up the $25,000 and a little extra to avoid falling victim to the PDT rule once you have a losing trade.
But if you don’t have that amount, your next best option is to use a cash account. It’s also worth remembering that you can change your account type quite easily at any time by reaching out to your broker.