This is probably one of the most frequently asked questions by newbie traders on my YouTube channel.
I have been day trading for over 7 years now. And let me tell you, day trading is not as easy as downloading Robinhood, depositing $100, hitting the buy button, and getting ready to fund your account to the moon.
I wish it were that easy. In this article, I will discuss how much money you should start day trading with as a new trader. Depending on your situation, there are 3 important factors to consider, and we will break them down so you know how to get started trading the right way on your first day of entering the market.
Overview
Let’s start with the facts. There are generally two groups of people when opening a brokerage account to start trading: those with $25k+ to begin with and those who don’t. This is the #1 factor to consider when starting day trading.
I don’t know about you, but when I started over 7 years ago, I didn’t have $25k hidden in bed to start a business. Trust me, I checked.
I’m definitely in the second group of people. However, let’s talk about the 90% of us who don’t have $25k. If you’re a $25k+ trader, please stick around because all of this is important, but I’ll cover some essential tips on how to start with $25k+ later, back to the majority of traders on day one. Don’t worry, I got you.
First, we need to understand why 25 thousand is a significant number.
1. The PDT Rule
If you are in the US or just using a US broker, you may be subject to the PDT rule if you are trading with a small account under $25k. The PDT code stands for Index Day Trading Code. It limits the trading frequency if you have less than $25k in your account. Under the PDT rule, a day trader can only make 3 trades in 5 consecutive days.
If you are in the US and started day trading with less than $25k in your account, unfortunately, this rule applies to you. I know, it’s too bad. The SEC has no business limiting what you can do with your hard-earned money, so here’s an article on how to get it.
However, if you live abroad, there are differences depending on your country. For example, if you are like me and are in Canada and use Interactive Brokers, Trade Zero or Questrade, you don’t have to worry about the PDT rule. Even if you invest less than 25k, you won’t have any restrictions on how often you can trade.
2. Market Tuition
Before you think about how much money I need to put into my account to make $100 a day, think about how much I need to pay to start learning about the markets in real time.
Let me explain. Day trading is very profitable, but only those with experience and education can treat it like a business.
Based on my experience trading the markets for over 7 years, beginner traders should start with at least $4,000-$5,000, at best. Anything less than $2k is too little, in my opinion.
Like going to school or college, you pay for an apprenticeship to learn a skill from an expert in a certain field. You need to focus on your education first to use what you learned to make money from that education in 2-4 years, and if you are a doctor, maybe not even for 8-10 years. The point is that your money now should make you more money. Not right away.
However, this is why I highly recommend new traders approach day trading the same way when they are just starting. Don’t focus on making money. Focus on learning with that money.
You should think of that $4,000 or $5,000 as a market education and expect to pay at least 50% over time as you go through that market education. That’s the money you’ll pay for commissions, live market data subscriptions, short-term fees, and making small mistakes that will cost you $10 to $20 per trade.
I also recommend finding a mentor or business community to learn from, just like you would in college. Check out the Humbled Business Community or sign up for our free stock list every Sunday.
As of mid-2020, most brokers have exceeded the minimum capital required to open a trading account. Everyone used to need $2,500, sometimes $10,000, but that’s not the case anymore.
Even without the broker minimum, new traders should start with at least $4,000-$5,000. This will give you a better opportunity to learn, make some mistakes, recover from those mistakes, and ultimately become more consistent and profitable, provided you have learned to use risk management in a disciplined manner.
What if you have less than $4 to $5K?
You can open a trading account, but start with accurate trading data. My advice is still the same. Focus on learning paper trading first, and build up your time and experience before a screen.
At the same time, don’t quit your day job. I really can’t stress this enough. Keep working and saving to fund your super account in two months when you’re ready to move on.
To put this in perspective, people often spend six figures, like me, on college tuition. I don’t recommend that to anyone, by the way. In comparison, paying $4,000 for a market education to learn this highly skilled trade seems fair. It’s a business, so you must pay to participate and learn.[1]
Good luck if you are not willing to pay for market education and think you can turn $1,000 into $1 million in six months by driving a different Lamborghini every day of the week. It probably won’t work for you.
I’m not going to feed you glue. I’m just telling you the cold, hard truth.
With that in mind, here are some brokers to deliberate if you’re opening an account with less than 25k. These are Thinkorswim and Trade Zero interactive brokers.
3. Do not start trading with your entire $25,000
This is more common in the second group of people over 25k, but unfortunately, I have seen it happen to newbies many times. Many of them have made good incomes from their careers as engineers, doctors and lawyers, all professions my parents wanted me to do.
And now I am the shame of the family.
However, it is fantastic for new entrepreneurs with much-starting capital. You do not need to worry about the restrictions of the PDT rule, but my advice remains the same. Start a small business with a risk of $50 or $100 or whatever you are willing to pay for a market education.
It is even more important for traders to start with a big account, trade small at first and learn.
You don’t want to be in a situation where you start with 5,000 shares, follow the high of the day, and suddenly get dumped. Your big account of $27k is now down to $10k. Unfortunately, I have seen this situation many times.
At the very least, they could have lost $10k. When I started day trading, losing $100 was terrible. At the time, that was half a day of my full-time job.
Just because you have a large trading account with no PDT limit does not mean you should skip the necessary steps in day trading and forgo risk management.
I would recommend brokers like Cobra Trading, Centerpoint Securities and Interactive Brokers.
Conclusion
Learning how to trade and profit from day trading are two different goals. You can’t achieve the second without working on the first. As mentioned earlier, as a new trader, you should focus on learning and observing the markets, not trying to make money.
There is absolutely no way for a new trader to sit down and learn how to plan a trade, manage risk, read price action charts, and learn how to analyze the news if they are too busy looking at the PNL from green to red to green up their newly funded micro account.
The takeaway is whether you are starting with $4k or are already making over $25k. Focus on learning before you focus on making money.
Day trading is not easy. You will not get rich tomorrow or in the next few months. If you are looking for buy and sell alerts to get rich quickly or just looking for a fun hobby, day trading is probably not for you. However, if you want to take this business seriously, you better be prepared to work hard.