Day Trading Lesson: Roadmap Step 6
In my post Day Trading Lesson: The Roadmap I present to list of steps to learn to Day Trade. Here are the details of Step 6:
Determine how much money you will need to fund your trading account
"What is the minimum height to become a basketball player in the NBA?" the coach was asked. "There is no minimum height" was his reply "But if you're under 6 feet you pretty much have no chance".
"What is the minimum amount of cash I will need to get started in Day Trading?" you ask. There is no minimum amount, but if you start with less than my recommendations in this post you pretty much have no chance. And as in basketball, having just the minimum can put you at a disadvantage.
Luckily, if you are an American citizen and you wish to trade stocks, the SEC has been kind enough to give you a definitive answer. And that answer is $25,000. Let me explain. The SEC has specific rules regarding what they call a Pattern Day Trader. Anyone who Day Trades will be labeled as a "Pattern Day Trader" very quickly (I wear the label proudly). And the SEC requires "Pattern Day Traders" to have a minimum account size of $25,000.
With this in mind you open a brokerage account with $25,000. You make a half dozen trades, and after commissions, your account value dips to $24,951. You try to place another trade, but the trade simply won't execute. No, there's nothing wrong with your trading platform - your broker is just enforcing the SEC rules. Your feeling of annoyance is misplaced - you should really be thanking your broker for going out of his way to support the SEC. So a more practical minimum account size for stock trading would be somewhere around $30,000.
Hey guess what? Just when you thought the SEC was close to perfect, I'm here to tell you they forgot something. They forgot about futures traders. If you trade futures (including e-mini futures) there is no minimum account size set by the SEC or any other agency of your friendly Uncle Sam. You are only limited by broker minimum account sizes, margins and common sense. Some brokers have a minimum account size of $10,000 and some are less.
In case you are not familiar with e-minis let me explain what I just said about margins above. When you trade e-minis you buy (or sell) a contract, as opposed to a share in stock trading. A small trader of e-minis might buy 1 or 2 contacts, in the same same way that a small trader of stocks might buy 100 or 200 shares. The e-mini margin requirement is the amount that your broker requires you to have in your account per contract you trade. Depending on who your broker is, and which e-mini you are trading, the margin requirement would be somewhere in the area of $2000 to $5000 per contract. Add a little common sense to the broker account minimums and the margin requirements, so a ballpark minimum amount of cash you need to get started in trading e-minis is $15,000.
Please note that you need this much that you can actually put into your trading account. This does not include other trading expenses, like a decent computer or monthly data feed expenses. But more importantly you must consider that the money put in your trading account must be money you are willing to put at risk. Your available cash should be much more that the amount you use to fund you account. How much more in not for me to say.
A friend of a friend of mine once asked my advice. He said "I have about $6000 total cash. I hope to raise another few thousand by selling my car, and a few thousand more on a credit card cash advance. This should give me about $12,000 to open a Trading account. Can you recommend a good broker?" My response was "No, but I can recommend a good psychotherapist".






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