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Day trading

This fast-paced trading style can be lucrative — and highly risky.

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Day trading can be profitable. But even the most experienced and well-equipped day traders experience losses. Is day trading worth it? It depends on your risk tolerance and skill level.

What is day trading?

Day trading is the act of buying and selling the same security over the course of a single trading day. For example, let’s say you purchase three Apple stocks when the market opens and sell them that same afternoon. That’s a day trade.

Day trades can be executed in any market but occur most often in the stock and forex markets. Day traders typically aim to end the day with no open positions, which means they don’t hold securities overnight.

How does it work?

Day traders apply a significantly different approach to trading than buy and hold investors. Unlike passive strategies that seek long-term stability when selecting securities, day traders apply an active trading strategy that capitalizes on market volatility. Day traders use short-term market fluctuations and high leverage to their advantage, pouncing on small price movements to turn a profit.

To capitalize on the opportunity for profit, day traders must be willing to invest sizable sums, as this is the only way to make money on such small price movements. The more you invest, the more you have to gain — and more you could lose.

What is the pattern day trading rule?

The pattern day trading rule applies to day traders that execute at least four day trades within five business days. The rule was established by the Financial Industry Regulatory Authority (FINRA), is governed by the US Securities and Exchange Commission (SEC) and applies to all US brokerages. Pattern day trading isn’t illegal — but the pattern day trading rule limits who can execute day trades and when.

Your broker may deem you a pattern day trader if your day trading activity accounts for more than 6% of your total trading activity in five days. At this point, you’re required to bring your account balance above $25,000 to continue trading.

If you’ve been marked as a pattern day trader and fail to maintain a minimum account balance of $25,000, you won’t be able to day trade.

Is there any way to trade intraday without having $25,000 in my account?

If you’d like to day trade and don’t have the means to bring your account balance above $25,000, there are a few loopholes:

  • Make fewer trades. As long as you make no more than three day trades in five days period, you can execute day trades with less than the required pattern day trader minimum.
  • Trade outside the US. Foreign markets and brokers may not impose the same rules or account minimums as the US. Research international stock markets and brokers to find out about day trading regulations.
  • Trade forex. Currency pairs don’t qualify for FINRA’s pattern day trading rule, so you can get started in the forex market with less startup capital.
  • Trade futures. FINRA’s $25,000 account minimum also doesn’t apply to futures contracts, so if you’re determined to day trade and don’t have the capital, look into the futures market.
  • Open multiple accounts. With two accounts at two separate brokerages, you can make up to six day trades in a five-day period without being subject to the pattern day trading rule.
  • Join a firm. If you’d like to pursue day trading as a career, consider joining a firm. You’ll be provided with additional trading capital and have the opportunity to learn from more experienced traders.

Can I day trade using a cash account?

Some brokers will let you day trade in a cash account — but only using settled funds. Cash accounts must use settled funds to cover trades to avoid freeriding, which is the act of buying and selling securities from a cash account without having the capital to cover the trade. Stock and ETF transactions take three days to settle, while mutual funds and options settle in one day.

Freeriding is illegal and prohibited by the SEC. Traders who engage in freeriding will have their accounts suspended for 90 days. The freeriding rule makes it very difficult to day trade using a cash account.

What are the risks of day trading?

Despite the potential for profit, many investors shy away from day trading. And that’s because day trading is inherently risky — especially for beginners.

There are many ways to lose money day trading, from faulty technology to inferior research tools. Day trading is a high-risk, high-reward investment strategy. And the best way to lower your risk is to familiarize yourself with common day trading pitfalls.

What to look for in a day trading broker

The right broker can make or break your day trading experience. Here’s what to look for in a broker:

  • Reliability. The last thing you want to worry about when executing a sizable trade is a service outage. Unfortunately, outages do happen, and some brokers are more prone to them than others.
  • Speed. Day trading is a time-sensitive activity, so your broker’s fill times will factor into successful trade execution. Look for slow fill time complaints on trading message boards to find out which brokers have a reputation for delayed executions.
  • Reputation. Your ideal day trading broker should maintain a positive online reputation. Review trader feedback on the Better Business Bureau, Trustpilot and Reddit to find out what investors think of the platform.
  • Research tools. Many day traders rely on up-to-date market news and research tools, like advanced stock screeners and charts, to pull off profitable day trades. Find out what research and analytics tools your broker offers and whether they’re sufficient to support your trading strategy.

What do I need to start day trading?

As a day trader, it’s your responsibility to decide what tools are integral to your success. But if you’re looking to lay some groundwork, here are some common tools traders use:

  • Computer. A trading necessity to execute trades through your brokerage account. While a mobile device is less essential, it can help you check positions and execute trades on the go.
  • Internet connection. Before you sign up for an online brokerage account, you’ll need a quick and reliable connection.
  • Broker. Choose your broker carefully and make sure its platform is suited to your trading needs.
  • Trading capital. Unless you plan to circumnavigate FINRA’s pattern day trading rule, you’ll need at least $25,000 to day trade regularly.
  • Strategy. Test trading strategies through a paper trading account before you put your cash on the line.
  • Time. Successful day traders don’t trade as a hobby, but rather as a career. If you only plan to dabble in trading a few hours or days a week, day trading may not be for you.
Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

Day trading isn’t for everyone. It’s potentially profitable, but even with a solid strategy, a reliable broker and the right tech, the risk of losing money is high. Day traders must be prepared to lose capital, especially when trading on a margin.

The right broker can play a pivotal role in your success as an investor. Explore your platform options among multiple providers to find the best account for your needs.

Compare stock trading platforms

Name Product Available asset types Stock trade fee Option trade fee Annual fee
Vanguard
Stocks,Mutual funds,ETFs,Forex
$0
$1
$20 per year
Get a personal advisor when you open an account with at least $50,000.
Robinhood
Stocks,Options,ETFs,Cryptocurrency
$0
$0
0%
Make unlimited commission-free trades in stocks, funds, and options with Robinhood Financial.
Interactive Brokers
Stocks,Bonds,Options,Mutual funds,Index funds,ETFs,Forex,Futures,Cash
$0
$0 + $0.65/contract, $1 minimum
0%
IBKR Lite offers $0 commissions, and IBKR Pro offers advanced tools for professional traders.
TD Ameritrade
Stocks,Bonds,Options,Mutual funds,ETFs,Forex,Futures
$0
or $25 If it is broker-assisted
$0 + $0.65/contract,
or $25 Broker-assisted
TD Ameritrade features $0 commission for online stock, but watch out for high short-term ETF and broker-assisted trading fees.
Tastyworks
Stocks,Options,ETFs,Futures
$0
Stocks & ETFs: $1/contract to open, $0 to close, $10 max/leg
Futures: $2.50/contract to open, $0 to close
0%
Trade stocks, options, ETFs and futures on mobile or desktop with this advanced platform.
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