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.
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 $5,000) and you can trade with the firm’s capital which allows you full day trading buying power (sometimes more) and no day trading limit restrictions. You also can usually trade with a micro commission structure.
Of course as you might guess, there is no such thing as a free lunch. When trading with a prop firm you don’t get to keep 100% of your profits, you get a “payout” percentage that is based on a number of factors. You also may have to do a minimum number of trades or pay a fee to use their platform.
I have never used a prop shop myself but know traders who have. I have heard good and bad stories, so if you choose to go this route, make sure you fully investigate them and get some references before you commit.
There are no day trading restrictions on futures and since you are only required to put up a small percentage of your overall contract size, leverage is more than you will need.
That being said, if you are in any way thinking about trading gold ($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 $ES_F. I have personally spent the last two years trading it, having 23 years previous equities trading experience, and I still find it challenging at times.
No matter how hard you want to day trade with a sub-25K account, be forewarned that futures are a very, very tough and specialized asset class, and only a small number of new traders will ever be consistently profitable with them.
Like futures, forex has no day trading restrictions and ample leverage for small account traders. There has also been a proliferation of resources for learning about forex trading over the last few years.
One of the benefits of trading forex over futures is that you can have a minimum size position that better relates risk-wise with a small account. As a beginning day trader you should stick will the most liquid crosses like the EUR/USD ($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, there are many great currency traders out there to learn from like my punk rock friend @CloudChartist, @Tradergav, and @faithmight.
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.
Also published on Medium.