daytrading

Are you ready to be a Full Time Day Trader?

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It is very important to have an established trading plan, rules, and a back-tested strategy.  Many new traders get caught up in the glitz and glamour that are often associated with professional/successful traders.  The new traders forgot about the learning process and the amount of time needed in order to perfect a strategy. Poor preparation leads to failed results from a skewed reality of trading. As you know Theprofitroom is pro-education! It’s a proven fact that the proper training shorten learning curves.

Too much debt.  The Key is to be debt free! as in no car note, student loans, credit card or even a mortgage debt.  You want to be at ease when it comes to trading because financial obligations can easily burden and hinder your trading performance.  The stresses of trading is one thing but stress under the pressure of a “need” to perform is another thing.

Savings.  You need about 2 years minimum savings! I would advise 3.  Savings in case of emergencies, medical, or if your car got towed etc. Savings to help cover your basic cost of living expenses, such as a cell phone bill, groceries, a place to live etc. Savings just in case the first year of trading full time is absolutely horrific! You will need a cushion in order to give your mind some peace and to transition properly without the pressure to perform.

The recommendations above are conservative/ not factual but rather subjective depending on the person.

How to determine which markets to Day Trade? It all depends on your starting capital as well as the knowledge and information you are exposed to. Day Trading Forex: You can start with $50! Seriously, there are many forex brokers with a low capital requirement when entering the forex markets (but please make sure you perform your due diligence) Not all forex brokers are legitimate. Day Trading Futures: Most future Brokers will allow you to start with $500-$1000. The futures market moves extremely fast and your skills will be tested! Day Trading Cryptocurrency: This is a low entry barrier market as well, you do not need a lot of capital to get your feet wet!

25,000 :: In order to day trade you will need 25,000 in your account, at all times if you are trading Stocks or Options in a Margin account! This rule is a FINRA (formerly National Association of Securities Dealers, Inc. or NASD) You can read more about this rule on Wikipedia and various financial sites.   We know that there are brokers like CMEG which will allow you to day trade with no PDT rule (money under $25,000 :-), they are registered with the IRS and insured by Loyds of London, which has been in business for over 330 years.  Trading with under 25K is optional to the individual but realistically it is like funding any other start up business–you need the Capital.  Many times traders fail because they are under capitalized.  Same thing applies for other start-up companies. There is a difference for someone trading with less than 25K living in their parents basement/home or have a secondary source of income than for someone else with NO CRUTCH trying to achieve success as a full-time trader.  Just know the difference and come to the day-traders world totally prepared.

What is Pattern Day Trading

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Pattern Day Trading is for a stock market trader who executes four or more day trades in five business days in a Margin account. This rule was created by FINRA (financial industry regulatory authority) to protect the beginner traders. (So they say) In order to have a pattern day trading status you need to have $25,000 in your account at all times, as long as you decide to make four or more day trades in five business day.

Active traders who have $25,000 in their brokerage account can apply for a day trading account. Day Trading accounts your U.S broker will provide you with 4:1 leverage and that is only for a trader who has an account with $25,000 or more.

 In a regular margin account your U.S broker will offer you 2:1 leverage. For example if you funded your account with $500 and you applied for a margin account, you will then have an additional $500 bringing your total purchasing power to $1,000. With leverage comes responsibility. You can lose more than your initial balance and some of your broker’s margin, which will cause a “margin call” You will be required to fund your account to the “margin call balance” deemed by your broker. With a margin account you are able to short sell stocks. You can not short sell a stock in a cash account.

 In a cash account the pattern day trader rule does not apply. Cash accounts, with a buy or sell transaction with stocks there is a 3 day settlement. As in your funds are tied up (assuming you used all your cash to either buy or sell a stock) You will simply have to wait until the funds settle. Cash account traders will limit their trades to a very few due to the cash settlement standards.

Typically traders who have a margin account with funds under $25,000 are generally the ones who often get in trouble for making four or more trades in a three day rolling period. Your broker calls this “free riding” you are trading on unsettled cash even if you have a margin account but not enough to clear you of the pattern day trader status. There is a penalty if warned more than twice, such as freezing (locking your account) for 90 Days.

How to get around the PDT (pattern day trader law)

There are a few ways around this rule, if you do not have the $25,000 in your account. One way is to Swing trade.

1.) Swing Trading is not day trading, you will be taking advantage of time and allowing the trade to work out based on analysis and trend. You can make a few swing trades in your account without over trading. Swing trades generally takes 1-3 days or up to a few weeks to work out.

2.) You can open multiple brokerage accounts. The only thing you will have to keep track of the trades taken in each account. Remember no more than 4 trades in a 3 day rolling period per account.

3.) Learn how to trade a different market. Futures and Forex both these markets require way less capital to trade. There is no pattern day trader rule with these markets.

4.) Open up an overseas brokerage account. The very last step on this list. The U.S markets are governed by the S.E.C and the brokerage accounts are protected by SIPC (Securities Investors Protection Corporation) up to $500,000. Do your due diligence on an overseas broker, if you decide to go that route.

Just know that small accounts have the potential to develop into large accounts. The Profit Room have done numerous small account challenges. We took $1,000 in forex and grew it into 6 figures. As well as our swing trading account challenge. It’s just a matter of the proper education/mentorship.