Day Trading In USA: Restrictions & Alternatives

Day Trading in USA – What You Need to Know

‘Day trading’ has become quite the buzz phrase and not just in the investment community but in general. This is because of the speed of technology, the availability of financial resources, and brokers have all worked together to proliferate it. Trading as it was traditionally known has changed, and as a result Joe Public can now also get in on the action. However, it’s important to note that widespread availability doesn’t mean that day trading is easy or inexpensive. Not only does day trading require that you regularly revisit your skill sets, it also requires an amount of capital – also known as an equity balance – and in the US that equity balance needs to be at least $25 000. The immediate question that might arise is, can one get around such a high amount? Is there a loophole? Are there alternatives? Let’s first see why the equity balance is so high.

Day Trading Restrictions in the US

The Securities and Exchange Commission (SEC) has set forth certain restrictions when it comes to day trading – these restrictions are applicable to what they deem as “pattern day traders”. In other words, people who trade consistently – in the eyes of the SEC are required to have what is known as an equity balance of $25 000 in their trading account. This prohibitive cost could be there to serve as a gatekeeper or it could be there for the brokers to safeguard themselves; having said that, let us examine in more detail what the SEC defines as a “pattern day trader.”

What Is a Pattern Day Trader?

According to the SEC, a day trade is a trade that is opened and closed within the span of the same trading day. The types of trades within the confines of a single trading day can be a buy-to-open vs. a sell-to-order or a short sale, to name but the essentials. Should you find that the amount of trades you’re doing within five days is 4 or it exceeds that amount, then the SEC will deem you a pattern day trader. And let’s face it, the likelihood of conducting less than four trades a week, especially if you’re looking to make something out of your trading endeavours, is rather low.

What Are Your Broker’s Requirements?

So here’s the thing, the SEC is an overseer, setting the minimum requirements that it expects the industry to follow. Thus even if the minimum equity balance is $25 000, your broker’s asking fee might be more. In addition to being more, there might also be even stricter regulations imposed by the broker. For instance, perhaps instead of considering you to be a pattern day trader based on 4 trades within 5 days, your broker might set the bar higher and mark you as a pattern day trader for doing 2 to 3 trades within 5 days. It’s important to note that while this could seem petty, brokers need to safeguard themselves against certain financial risks.

What Alternatives Can I Seek Out?

It needs to be known that if your equity balance dips below the 25K mark, your trading activities will be suspended. There are other limitations too, such as leverage – which sits at 4:1 for day traders in the US. To illustrate, if you’ve got $40 000 in your account, you can climb as high as $160 000 in accumulations. Right about now you might be asking yourself, ‘are there loopholes?, ‘what are my alternatives?’ The good news is there are alternatives – for one, the equity balance restriction is only applicable to US stock markets. With this in mind, you might rather want to opt for the US futures and currency markets because they don’t have defined equity balances. If you don’t have 25K to trade with, then participation in forex and futures might just be what you’re looking for. Americans looking to trade USD/CAD will find the currency markets perfectly suited for these kinds of trading activities. Some brokers will ask that you have as little as $500 in your account, although it’s recommended that you have at least $5 000. In addition to the incredibly low entry fee, leverage for this type of trading sits at 50:1.