How To Day Trade With Less Than $25,000

This post has me in a bit of a conundrum.  I am writing about something that I am not totally on board with but recognize as a necessary evil; day trading with less than $25,000 in your account.

Day trading is definitely one of the hardest things that somebody can do, and the optimal way to do it is to have a well-capitalized account and some practical experience in riding the intraday lightning.  The obvious financial issue is that not everybody can afford to drop 25K+ into a trading account to get day trading privileges, and the experience issue ends up being a “chicken or the egg” scenario.

I know that some of you are shouting at your screens right now, and not just because a trade is going against you.  You’re yelling “Hey Poindexter, how about paper trading?”  Well, I don’t believe in paper trading, a point I made again in my recent post about finding a trading mentor.  My alternative is to trade small position size until your skill/equity level gets to the point where you can start to scale up.

That post prompted a lot of emails posing the question, “how can I get practice/experience day trading since I don’t have $25,000 to put in my account?”  This then is my answer to that question.

The Rolling Five Day Method:

This is the best and I believe safest method for day trading a sub-25K account.  You are allowed to do three-day trades during a rolling five-day period.  You won’t get 4x buying power, but you can use regular 2x margin for your trades.

I like and recommend this method most because it forces you to be more discriminating in your trading choices.  If you see a number of mediocre setups one day, you are more likely to pass on them and wait for more optimal ones on another day since your dry powder is limited.

The Split Brokerage Account:

So let’s say that you have only 10K to trade with, and you are dead set on day trading (…you know there are things called “swing trading” and “position trading” too).  You can split your funds in half and open two accounts with two different brokers.

By doing this you will effectively be able to do six day trades on a rolling five-day basis (once again only with 2x margin buying power), which should be more than enough for a beginning trader.

In the past this would be an awkward way to execute trades, but the ease with which you can now open accounts, transfer money, and trade online makes it definitely a viable option.

The Split Brokerage Account Wash Method:

Same set up as above but if you insist on having an almost unlimited ability to day trade a sub-25K account, this method will appeal to you.

For example, you take a long trade of 50 shares in XYZ in broker #1.  When you are ready to “close the position” you just sell short 50 shares of XYZ in broker #2, effectively making you flat.  You can then close each side out the next day, without using up any of your three day trades.

Obviously you will incur some extra costs as you will have four commissionable events instead of two, as well as a bit of slippage depending on the width of the spread on the stock you are trading.  Because of this, I suggest you only use this method if you are trading with a per share commission set up.

If you are trading small (25-100 shares), you will most likely only incur a minimum ticket charge per side (usually $1.00) and the slippage costs, if any, will be negligible.  It’s a small price to pay for almost unlimited day trading ability with a sub-25K account.

One last note on the “Split Brokerage” options.  I highly doubt it, but it is possible that in the mounds of SEC regulations that exist, there might be some rules against trading two separate brokerage accounts in this related way, but if there is A) nobody is monitoring it, and B) really, what would the “penalty” be?  I think I can safely say that for all intents and purposes, this is completely allowable.

Prop Trading:

There are a number of prop trading firms out there that you can trade with, either on their floor or “virtually.”  These firms allow very small account minimums (often as low as $5,000) and you can trade with the firm’s capital which allows you full day trading buying power (sometimes more) and no day trading limit restrictions.  You also can usually trade with a micro commission structure.

Of course as you might guess, there is no such thing as a free lunch.  When trading with a prop firm you don’t get to keep 100% of your profits, you get a “payout” percentage that is based on a number of factors.  You also may have to do a minimum number of trades or pay a fee to use their platform.

I have never used a prop shop myself but know traders who have.  I have heard good and bad stories, so if you choose to go this route, make sure you fully investigate them and get some references before you commit.

Futures Trading:

There are no day trading restrictions on futures and since you are only required to put up a small percentage of your overall contract size, leverage is more than you will need.

That being said, if you are in any way thinking about trading gold ($GC_F), oil ($CL_F), wheat ($ZW_F), or basically anything other the E-mini’s, just send me 95% percent of your trading funds and ask your friend to slam your head in between your car door.  That you way you will end up with more money and still feel better that you would otherwise.

The S&P 500 E-mini ($ES_F) and the NASDAQ 100 E-mini ($NQ_F) are the ONLY futures contracts that a beginning trader should try to day trade.

Even so, it is still tough for a lightly capitalized trader to trade $EF_F as each point is equal to $50.00 ($12.50 per tick, four ticks to a point).  If you have a 5K account, only one point would equal 1% of risk capital which does not give you much room to be wrong.  You would probably want to have a minimum account size of 10K+ in order to effectively trade the $ES_F.

The $NQ_F is only $20.00 per point ($5.00 per tick, four ticks per point), but moves faster, farther, and more erratically than the $ES_F.  I have personally spent the last two years trading it, having 23 years previous equities trading experience, and I still find it challenging at times.

No matter how hard you want to day trade with a sub-25K account, be forewarned that futures are a very, very tough and specialized asset class, and only a small number of new traders will ever be consistently profitable with them.

Forex Trading:

Like futures, forex has no day trading restrictions and ample leverage for small account traders.  There has also been a proliferation of resources for learning about forex trading over the last few years.

One of the benefits of trading forex over futures is that you can have a minimum size position that better relates risk-wise with a small account.  As a beginning day trader you should stick will the most liquid crosses like the EUR/USD ($EURUSD).  If you trade the EUR/TRY (Euro against the Turkish Lira), once again, put head in car door……

Currencies have their own set of challenges.  They do not trade like equities, however many traders feel that they do more closely respect the “rules” of technical analysis. Fortunately, StockTwits has a ton of forex blogs like FaithMightFX, Raghee Horner, The FX Cafe, StockTwitsFX and many great currency traders like my punk rock friend @NoDoji.

Conclusion:

So there you have it, how to get around the system, beat the “man,” and be a trading vandal.  Just make sure you always keep risk foremost in your mind so that you can graduate from this level of trading and make it to a fully funded day trading account.

If you want to learn more about trading and the markets, all while helping to kick pediatric cancer’s ass, check out my book, Trading: The Best Of The Best – Top Trading Tips For Our Times.  It includes over 200 market tips from 60 active traders and investors, and all proceeds go to the McKenna Claire Foundation to help support research for a cure.  Just click the banner below or go directly to Amazon by clicking here.

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29 Responses

  1. Brian, buying and selling something to yourself is called “wash trading” and is illegal, though for these purposes and in such tiny amounts i’m sure you’d be fine.

  2. I find it hilarious that you say to anyone that even attempts to trade GC or CL to simply hand them your money. You clearly don’t know how to trade futures at all. It’s not that they are to fast its that you are to slow.

  3. Anybody looking to swing/day trade… Research Elliot waves! Most reliable form of technical analysis *if mastered* due to having “rules”. It applies to every move possible from intraday to monthly charts.

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  5. I also am an experienced trader.
    I never—lose money….i trade every day.
    Day and swing.
    Using less than 25k and keeping margin balance under 55k/but over 49k…on average.
    This is b/c of interest rate average.
    Which of course is one of the many things to monitor/maintain a strategic average.

    The majority of people will tell you something like ; there is no arbitrary strategy in trading.
    Or the famous control your loss
    This negates the whole point of trading.
    Even your own online brokers…Teach You Wrong;on this point;and others.
    If there is loss then u are guaranteed to be working on win/lose average;which is where the majority of traders to be are.
    There is no point in this.
    There is another way.

    I trade common stocks ;only.
    The same stock every day;mostly.
    Also, i trade (sometimes) top 10 breakouts on the nasdaq;by volumn.
    Highest percent gainers.
    Be careful if u try this to be sure u can short the security/b4 u go long on it;this is to cover your butt just in case the market turns against you before you can take even a minimum profit(just a little above your transaction fee).
    Most of the time/u will not be able to short the security.

    There is a technique that can be used that allows one to make cash every day w/o 25k balance with 4x margin.

    The goal should be unwithdrawn exponential capital gain.
    Anything other than this;is a financial and time consuming set back. for the poor.

    In the market;there are predators….and there are prey.
    This is reality.

    I am gonna go out on a limb and say here that anyone that tells you what i just said is even lying with intention to mislead you/or_____is telling the truth;but they are very unlikely to share their strategy with anyone because of the predator/prey reality.

    I will
    I charge nothing.
    With experience;just about anyone can do this.
    EXPERIENCE

    The TRUE PREDATORS out there will (NOT TELL U THE TRUTH B/C THEY WANT U TO JOIN THE FUND THE MARKET GANG).

    Successful traders with 90% efficiency or higher do/will/and will continue to keep you in the dark SO THEY CAN KEEP TAKING MONEY FROM THE MARKET AND THE UNFORTUNATE MAJORITY;MOSTLY THE LITTLE MAN.

    I have never shared my strategy with anyone either;therefore i know what i am saying is absolutely correct.

    A lot of people have good intentions and not everyone only;thinks of themselves;however the majority do.
    This explains all these you tube videos;which for the most part are useless;as many of you already know.

    Remember,if you listen to them,you are likely following a particular strategy not yet proven by you to work __every time.

    Please/ to all__________be careful who and what you listen and take to heart.

    I strongly advise the (non above 90% productive traders) to paper trade long/short using hedging strategy box/butterfly; yes on common stocks (stock)

    Generally,to master and familiarize ones’self with just one stock that meets specific daily productive criteria

    If you don’t know what these are;get more experience and education before investing a dollar.
    Education does not have to be so expensive;this is the purpose of pre education/especially when it is concerning trading in the market.

    SMA
    EMA
    RSI
    VOLUMN
    MARKET DEPTH QUOTE MONTAGE
    RED/GREEN CANDLESTICKS
    MACD
    TRADER SENTIMENT (DAILY SAME STOCK) 6 MONTH MINIMUM OBSERVATION
    FUNDAMENTALS

    master each of these and with a lot of experience using the same common stock that meet desired criteria;there is no reason using law of averages/keeping net long/short average position pricing less than .25 cents apart and keeping your individual long/short positions within 3 to 6 cents apart;one cannot make money every day.

    Be sure to improve your pricing position average given your box average when you reposition your box to net zero.
    eg. 10k shares long 10k shares short = net 0 same stock

    On days when you have a day trade available,you should (always) be able to gain capital twice;as long as the price moves over .05 cents low/high spread;and you have enough experience.

    Like everything else/
    Trading stocks takes a lot of genuine hard work/correct strategy/adjusted strategy (in real time)
    and experience to be sucessfull.

    Words of wisdom_____________IDENTIFY YOUR PERSONALITY TYPE—–FIGURE OUT GIVEN YOUR PERSONALITY TYPE WHAT YOUR WEAKNESSES ARE——BE HONEST WITH YOURSELF——ADJUST TO OVERCOME YOUR WEAKNESSES.

    EDUCATE YOURSELF WITH WHAT YOU KNOW WORKS / (NOT) WHAT YOU HEAR WORKS.

    there are no short cuts or replacements for truly earning a money machine
    When correctly educated,practiced and maintained;your box equaling net 0 should be

    Like An atm that NEVER RUNS OUT OF CASH; in your house/office.
    Email me if I can help you.

    good luck :)

    G.
    hammerheadman2002@yahoo.com
    Trader

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  7. This article is misleading. You can day trade options in a cash account all you want as long as you use settled funds. And since options settle in one day this can be a very attractive tool for the beginning day trader who has limited funds.

    TC

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  9. This post really displays your arrogance and ignorance.

    How much experience do you think a new trader will get with the split account method vs. simulated trading? Doing a handful of day trades per month? He should become a fine daytrader in what… 25 years… day trading at the pace you suggest? REPETITION is key man. You must not day trade much. It’s like telling someone who wants to become a poker pro to play poker once a week when he can get his buddies together, instead of playing online, where he can play thousands of hands per day.

    You speak as though futures trading is a losing game… what about a newbie that takes his 5 or 10 k to a prop firm? He gets leverage and guess what? He’s gonna use that leverage and blow out his 5 – 10 k in no time. At least trading futures he has no restriction on day or swing trading. He can trade at night and he won’t pay commissions to the firm, just for the privilege of losing his money there.

    Your opinion on sim trading sounds equally as ignorant as those idiots that don’t believe in technical analysis.

    New traders should sim trade first, then move to trading live in small amounts.

    • I thought the two broker accounts (which i already have) was a good idea. I didnt realize you could use the 2nd account for it’s 3 day trades within a 5 day period. So i plan on using this method.

      As far as your hyperbolic useless analogies are concerned. Shut it. You’re the one who sounds arrogant. It’s like you’re one of those guys who thinks he’s SUPER SPECIAL because he ‘trades on the markets!’ (like 90% of traders) So when you read something like this that is very simple, clear cut and straight forward you freak out. Why? because subconsciously your delusional ego has convinced yourself that “Trading is for the badasses”, “For the super cool”, “For the hardcore race car drivers”, “For the fighter jet pilots”. Drinking the CNBC media flim flam much?

      Yeah whatever… i use my 3 day trades every week and make 20-30% with my account on penny stocks. Sitting back in my chair like a lazy slob. Haven’t showed in weeks. I just use a good stock screener, find $1-4 dollar stocks with massive volume, recent gains of 10+ % and good looking 1,3,6,y chart patterns. Then i’ll swing trade the S&P while my 3 day trade recharge for another go.

      You should sub to my newsletter. Teach you how to be a real master.

  10. This of course also begs the question if you should devote time to day trading if you don’t have enough capital to do it. With 10k in assets, how much are you expecting to make? And how much is that if you divide it by the hours you put in…

    • Well, lets assume you start with $2000 in a cash account and you only buy calls and puts. If your wise about your trades you could put on 200-300 in trades per day and make, say 10% of the investment after commissions. So $25 per trading day. If you can average this rate of return…which you should be able to if your going to truly excel at day trading…and trade 200 days/year, you made $5000 in the first year, or about $4000 after taxes (assuming you aren’t filthy rich and paying 30%+ on income, in which case you’d be starting with more than 2k!). Now, in year 2 you have 6000. Assuming your system continues to work you now have about 16k after year two and by year three you can start day trading in a margin account as you’ll have more than the requisite 25k. By year 4 or 5 you should be able to day trade full time and earn more than you were making at whatever job only allowed for 2k to start trading with! In my limited experience this is very doable. I don’t think I’ve ever read anything from an experienced trader that implied that it was easy. Especially those who started with little to nothing.

      Cheers,

      tc

  11. some firms let you go “short against the box” where you can sell short the same stock you are long. back in the day it was used when traders wanted to put off capital gains taxes. for this post, it would allow you to carry both long and short positions overnight to avoid the day-trading pattern rules. i believe they allow me to in my TradeStation accnt. just hit Short vs. Sell when u have that open position and want to lock in that profit.

  12. Thanks Brian, I feel a little bit validated to hear that a pro suggest what I stumbled upon a couple years ago. I’ve been trading in 4 accounts with less that 10k total for a while and I’m not rich, but I’m still solvent. I take advantage of the overnight hedge and am often more successful there than intra-day. Great post as always.

  13. For anyone wanting to trade Forex with a small account has to learn what happens when you have 100:1 leverage and a central bank intervention move happens and you are positioned wrong. That IS the worst case scenario in FX speculating.

  14. It is a conundrum. But the thing is, whether you intend to day trade or not, there are times when you must exit a trade; it’s dropping and you simply must. A cash account, which comes with no margin (a good thing, I think), allows day trades without limits. Clearing stock is a tedious 3day process, options only 1day.

    Risk has to be moderated in a smaller account, I think. Yes of course there’s the odd lottery ticket, plotted out and knowing you could lose most of it. But apart from that not losing money, smaller trades to build the account and real discipline. Losing 1% of a 5000.00 account, 50.00, begins to add up.

    But in a trending forgiving market, careful trades add up. Cash accounts are forgiving.

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  16. Brian, regarding the split account stuff:

    I actually currently have a long/short position across two different brokerage accounts at different dealers, because I wanted to cover my short without losing the borrow. However, I think that it’s illegal for me to trade against myself when I close this position out – ie, if I post an offer in Account A, I don’t think I can lift it from Account B… thoughts? Does this sound right?

    It’s a plausible scenario for me, because the position I have is thinly traded….

    • It’s an interesting question, but unfortunately a very esoteric one.

      I tend to think of it in terms of another analogy. If you are the night watchman at a large corporation, with a huge parking lot, and you park in the handicap spot that is right next to the door, what are the ramifications? Yes, technically it is illegal, but the mechanisms to enforce it (i.e. law enforcement randomly going into the mega lot of a private business at 3:00am), and the will to enforce it, (i.e. is any police officer really going to write that ticket?) don’t for all intents exist.

      That being said, I still don’t think the split account method is illegal, and certainly not for somebody trading 100 shares against their own account to make it flat. Now if somebody was trading size in that way with the intent to deceive or manipulate the market, perhaps it would be illegal.

      This reminds me a bit of a story from way back about “The Flipper.” A guy who was doing Eurex trades, and would post large outsized bids to move the market, and then pull them. It was a controversy back then because nobody could say if what he was doing was legal or not. ( Here is a link: http://www.traderdaily.com/08/insight-from-the-flipper-catching-up-with-paul-rotter/). That story although different than my example just illustrates how “murky” the rules and regulations can be in trading.

      -B

      • Everyone missed the biggest risk as it pertains to the split account. If there’s a huge move in the stock which causes a call in one of the accounts, a loss could result. For instance, if news comes out that’s really bad or there’s a flash crash, the broker could technically close out your losing long position, locking in the loss on that side of the trade. Of course you know what would then happen which is the stock would inevitably come back creating either a loss on the short side or a reduced gain which would not offset the losing long position. So there are ways that one could lose on a supposed hedged position. Believe it or not, I knew of a Forex manager that wiped out 90% of the investors’ accounts hedging a position at two different brokers during the Greek crisis for the exact reason I pointed out.

      • That is exactly the reason why i love double and triple ETFs… much less likely to happen since they are mostly “sector” based.

  17. Another thing you can do is trade in opposing ETFs. (SPY/SH, FAS/FAZ, AGQ/ZSL). Buy one of the pair and when you are ready to close the position intraday, buy an equal amount of the opposite ETF. Obviously this isn’t a perfect way to do things, and you can’t trade individual stocks. But just another idea.

    • Another thought – using options to delta-hedge a position on an optionable equity.

      If you’re looking to take profit on a long position (when vol/premium is typically lower), you could buy ATM puts with delta equal to your stock position. If the stock drops, you’ll be winning from both your long gamma and vega positions in the options.

      if you’re looking to cover a short (where vol/premium is typically peaking), you could e.g. sell ATM put spreads with equal delta to your position at the time. Requires minimal margin (only the difference between the two strikes), doesn’t require you to have upwards of 100 shares (as selling a call would), and benefits from vol dropping as would likely happen if the stock rises.

      In both cases, you can exit both the stock and options positions the next day, or just sell one off according to your directional bias on the stock.

    • I absolutely love those. The double and triple ETF’s make for quick and easy gains… Also seem to noticeably follow the rules of Technical analysis as well.

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