How Much Money do you Need to Start Day Trading?
This is perhaps one of the most commonly asked questions from new traders on my YouTube channel.
I’ve been day trading for over 7 years now. And let me tell you, day trading is definitely not as easy as downloading Robinhood, depositing $100, clicking buy buy buy and getting ready to bank on the moon.
I wish it was this easy. In this article, I'm going to be realistically talking about how much money you should start day trading with as a beginner trader. There are a total of 3 key factors to consider depending on your situation, and we’re going to break them down so you know exactly how to get started as a beginner day trader entering the market.
Overview
Let's start with the facts. Generally speaking, when opening a brokerage account to start trading, there are two groups of people: those who have over $25K to start with and those who don’t. This is definitely the #1 factor to consider when planning to start day trading.
I don't know about you, but when I first started over 7 years ago, I did not just have $25,000 somewhere hiding in my couch to start trading. Trust me, I checked.
I definitely fell into the second group of people. For now, though, let’s talk about the 90% of us who did not have 25K to start. If you’re a baller who has over 25K, please stick around because all of this is crucial, but I’ll discuss some very important tips for starting off with a larger amount of capital over $25K later. Back to the majority of starting day traders. Don't worry, I got you.
First of all, we need to understand why 25K is such an important number.
1. The PDT Rule
If you are in the United States, or simply just using a US based broker, you might be subjected to the PDT rule if you’re trading with a small account under $25k. The PDT rule stands for Pattern Day Trader rule. Basically, it limits how many times you can trade if your account is under $25,000. Under the PDT rule, the day trader can only place 3 day trades in a consecutive 5 day period.
If you’re in the United States and starting to day trade with less than 25K in your account, then unfortunately this rule applies to you. I know, this really sucks. It makes no sense that the SEC limits what you can do with your hard-earned money, so here’s an article on how to get around that.
However if you’re living abroad, there are some variations depending on which country you’re in. For example, if you’re in Canada like I am and using Interactive Brokers, Trade Zero or Questrade, then you do not have to worry about the PDT rule. Even if you are funding with less than 25K, you will have NO limitations on how often you can place trades.
2. Market Tuition
Instead of thinking about how much money I should fund my account in order to make $100 a day, think about how much tuition I need to pay in order to start learning about the markets in real-time.
Let me explain. Day trading is a very lucrative career but only for those who are experienced and educated enough to treat it as a business.
From my own personal experience trading in the markets for more than 7 years, new traders should start with a minimum of $4,000 to $5,000, ideally. Anything less than $2K, in my opinion, is too little.
Just like going to school or college, you are paying the tuition to learn a skill from an expert in a particular area. You need to be focused on education first, so you can use what you learned to make money from that education in 2 to 4 years or if you are a doctor, maybe not even until 8 to 10 years later. The point is that the money you have now is for you to make more money with, later. It’s not for right away.
I did exactly just that when I went to college and paid 6 figures in student loans. I went to study for 4 years, got a degree and started working, earning 5 figures before slowly earning 6 figures later on. That career in VFX didn’t exactly work out that well, so I eventually quit to day trade full time, but that's another story, which you could read right here.
Anyway, that's why I highly encourage new traders to treat day trading the same way when they first get started. Don’t focus on making money, but rather focus on spending that money to learn.
You should treat that $4K or $5K as market tuition, and you should expect that you’ll probably spend at least 50% slowly during the course of this market education. That's the amount you’ll spend on covering commissions, live market data subscriptions, short locate fees and making small mistakes that cost you $10 and $20 each trade.
I also encourage you to find a mentor or a community of traders to learn from, just like you would if you were going to college. Check out the Humbled Trader Community or sign up to our free stock watchlist sent out every single Sunday.
Starting in the middle of 2020, most brokers waived the minimum capital to open a trading account with them. It used to be that everyone required $2,500 and sometimes even $10,000, but that is no longer the case.
Even without broker minimums, I still believe new traders should start with a minimum of $4,000 to $5,000. It will give you the best chance to learn, make some mistakes, recover from those mistakes and eventually become consistent and profitable, assuming you learned to be disciplined through using good risk management.
What if you have less than $4 to $5K?
Yes, you can open a trading account, but make sure to start with live data simulated trading. My suggestion is still the same. Focus on learning with paper trading first, and collect screen time and experience.
At the same time, Do NOT quit your day job. I really have to stress this. Continue working your job and save up, so you can eventually fund your account bigger in a couple of months when you’re ready to go live.
Just to put this in perspective, people often spend six figures, like I did, on college. I’m not recommending that to anyone, by the way. In comparison, spending $4,000 in market tuition to learn about this trading career with so much more potential seems more than fair. This is a business, so you need to pay to participate and learn.
In fact, if you’re not willing to pay any market tuition, and your mindset is that you are going to turn your $1,000 into 1 million in six months while driving a different Lamborghini each day of the week, good luck. This probably is not going to work out for you.
I’m not going to feed you the kool aid. I’m just telling you the cold, hard truth here.
On that note, here are some brokers for you to consider if you’re opening an account with less than 25K. These are interactive brokers, Thinkorswim, and Trade Zero.
3.Do not start trading with your entire $25,000
This is more so for the second group of people who have more than 25K, but unfortunately, I’ve seen this happen way too often to beginner traders. There are many who have good income from their careers as engineers, doctors and lawyers, aka, all the careers my parents wish I had gotten into…
And now I'm the disgrace of the family…
Anyway, for the new traders who have a substantial amount of capital to start with, that's amazing. You don’t have to worry about the PDT rule restrictions, but my recommendation would still be the same. Start trading with small sizes and risking $50 or $100 or any small amount that you are okay with paying as market tuition.
In fact, it's even more important that the traders starting out with a big account trade small first and learn.
You don’t want to be in a situation where you start out with 5,000 shares, chase the high of the day breakout and suddenly get dumped on. Your big account of $27K is now down $10K. Sadly, I have seen this scenario way too many times.
At least they had $10K to lose. When I started day trading, losing $100 was devastating. That was half a day of work from my full time job at the time.
Just because you have a big trading account and no PDT restriction, doesn’t mean you get to skip the proper steps of day trading and throw risk management out of the window.
I’d recommend brokers such as Cobra trading, Centerpoint Securities and Interactive Brokers.
Conclusion
Learning to trade and making profits from day trading are two separate goals, and you cannot achieve the second without working on the first. Like I mentioned previously, as a beginner trader just starting out, your focus should be on learning and observing the markets, not trying to make money.
There is absolutely no way a beginner trader can really sit there and learn about planning their trades, risk management, reading price action on the charts, and learning about news analysis if he or she is busy staring at the PNL turning from green to red back to green on their newly funded small account.
Whether you are starting with $4K or you’re a baller with more than $25K, the takeaway is this. Focus on learning, before focusing on earning.
Day trading is NOT easy. You will NOT get rich tomorrow or in the next few months. If you’re just looking for buy & sell alerts to get rich quick or treat this as a fun hobby, the day trading career is probably not for you. However, if you want to treat this business seriously, you better be ready to put in the hard work.
