The Minimum Amount of Capital to Day Trade

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

The Minimum Capital Required to Start Day Trading Stocks

Chuanchai Pundej / Getty Images

To be a day trader of stocks, you need capital. The stock market has a legal minimum capital requirement to day trade, but there is also a recommended minimum which may vary by the individual trading style. Traders need to have enough capital to withstand a string of losses and have the flexibility to take a wide array of trades which present various risks.

Risk Management and Day Trading Capital Requirements

In order to determine the amount of capital needed, risk management must be addressed. Day traders shouldn’t risk more than one percent of their account on any single trade. If trading a $40,000 account, that means the maximum loss a trader should take is $400 on any given trade.

Capital is the day trader’s lifeline. Capital must be preserved during losing streaks, which inevitably occur. By only risking one percent, even a ten trade losing streak keeps most of the capital intact.

Risk is determined by the difference between your entry price and your stop-loss order, multiplied by the position size. The next section looks at some examples.

Minimum Capital Required to Start Day Trading Stocks

For day traders in the U.S., the legal minimum balance required to day trade stocks is $25,000. If the balance drops below this, day trading isn’t allowed until a deposit is made bringing the balance above $25,000. To allow a buffer, day traders in the U.S. should have at least $30,000 in their account if they wish to day trade stocks. On $30,000, no more than $300 should be risked on any one trade.

Stocks typically trade in 100 share lots and move in $0.01 increments. With $30,000 there is some flexibility; trade volatile stocks (may require a larger stop loss) and still keep risk below $300 with a small position size, or trade less volatile stocks (smaller stop loss) and take larger position sizes.

If you buy a stock at $40 and place a stop-loss at $39.70. Risk is $0.30 on the trade. If your position is 1000 shares, your position risk is 1000 x $0.30 = $300.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

This position risk must be less than one percent of the day trading account balance. To see if it is, divide $300 by 0.01, to get $30,000. To make this trade, your day trading account balance must be $30,000, or greater.

If trading very volatile stocks you may need to risk $1 per share (the difference between the entry and stop-loss price). In this case, it will only take 300 shares, which is the maximum risk on the $30,000 account. (300 shares x $1 = $300)

If trading a low volatility stock, you may need a risk of $0.05 per share (the difference between entry and stop-loss price). In this case you can take $300 / $0.05 = 6000 shares. We just divided the maximum risk by the risk on the trade to get the position size.

Math like this should be done on every trade, making sure that each trade is one percent or less of the current account balance.

Day Trading Capital and Leverage

Day traders can typically access leverage up to 4:1 on their capital. If there is $30,000 in the account, up to $120,000 worth of stock can be traded at any given time ($30,000 x 4).

That means position size multiplied by the trade price can equal more than the day trading account balance. Notice that the first example above requires $40,000 in buying power to attain (1000 x $40), yet the trader only has $30,000 in the account. It is the power of leverage.

Even when leverage is used, the one percent risk rule is always applied to actual account balance ($30,000 in this case).

Capital Required to Start Day Trading Stocks

It’s recommended that day traders start with at least $30,000, even though the legal minimum is $25,000. It will allow for losing trades and more flexibility in the stocks that are traded. Day traders can trade more volatile securities, which will often require a larger stop loss but a smaller position size, or trade less volatile stocks with smaller stop loss but a larger position size. Total risk on a single trade should not exceed one percent of the day trading account balance.

The Minimum Capital Required to Start Day Trading Forex

Martin Child / Getty Images

It’s easy to start day trading currencies because the foreign exchange (forex) market is one of the most accessible financial markets. Some forex brokers require a minimum initial deposit of only $50 to open an account and some accounts can be opened with an initial deposit of $0.

And unlike the stock market, for which the Securities and Exchange Commission requires day traders to maintain an account with $25,000 in assets, there is no legal minimum amount required for forex trading.   

But just because you could start with as little as $50 doesn’t mean that’s the amount you should start with. You may want to consider some scenarios involving the potential risks and rewards of various investment amounts before determining how much money to put in your forex trading account.

Risk Management

Day traders shouldn’t risk more than 1% of their forex account on a single trade. You should make that a hard and fast rule. That means, if your account contains $1,000, then the most you’ll want to risk on a trade is $10. If your account contains $10,000, you shouldn’t risk more than $100 per trade.

Even great traders have strings of losses; if you keep the risk on each trade small, a losing streak can’t significantly deplete your capital. Risk is determined by the difference between your entry price and the price at which your stop-loss order goes into effect, multiplied by the position size and the pip value.

Pip Values and Trading Lots

The forex market moves in pips. Let’s say the euro-U.S. dollar (EUR/USD) currency pair is priced at 1.3025. That means the value of one euro, the first currency in the pair, which is known as the base currency, is $1.3025.

For most currency pairs, a pip is 0.0001, which is equivalent to 1/100th of a percent. If the EUR/USD price changes to 1.3026, that’s a one pip move. If it changes to 1.3125, that’s a 100 pip move. An exception to the pip value “rule” is made for the Japanese yen. A pip for currency pairs in which is the yen is the second currency—called the quote currency—is 0.01, which is equivalent to 1 percent.   

Forex pairs trade in units of 1,000, 10,000 or 100,000, called micro, mini, and standard lots. 

When USD is listed second in the pair, as in EUR/USD or AUD/USD (Australian dollar-U.S. dollar), and your account is funded with U.S. dollars, the value of the pip per type of lot is fixed. If you hold a micro lot of 1,000 units, each pip movement is worth $0.10. If you hold a mini lot of 10,000, then each pip move is $1. If you hold a standard lot of 100,000, then each pip move is $10. Pip values can vary by price and pair, so knowing the pip value of the pair you’re trading is critical in determining position size and risk.

Stop-Loss Orders

When trading currencies, it’s important to enter a stop-loss order in case the value of the base currency goes in the opposite direction of your bet. A simple stop-loss order would be 10 pips below the current price when you expect the price to rise or 10 pips above the current price when you expect the price to fall.

Capital Scenarios

$100 in the Account

Assume you open an account for $100. You will want to limit your risk on each trade to $1 (1% of $100).

If you place a trade in EUR/USD, buying or selling one micro lot, your stop-loss order must be within 10 pips of your entry price. Since each pip is worth $0.10, if your stop loss were 11 pips away, your risk would be $1.10 (11 x $0.10), which is more risk than you want.

You can see how opening an account with only $100 severely limits how you can trade. Also, if you are risking a very small dollar amount on each trade, by extension you’re going to be making only small gains when you bet correctly. To make bigger gains—and possibly derive a reasonable amount of income from your trading activity—you will require more capital.

$500 in the Account

Now assume you open an account with $500. You can risk up to $5 per trade and buy multiple lots. For example, you can set a stop loss 10 pips away from your entry price and buy five micro lots and still be within your risk limit (because 10 pips x $0.10 x 5 micro lots = $5 at risk).

Or if you choose to place a stop loss 25 pips away from the entry price, you can buy two micro lots to keep the risk on the trade below 1% of the account. You would buy only two micro lots because 25 pips x $0.10 x 2 micro lots = $5.

Starting with $500 will provide greater trading flexibility and produce more daily income than starting with $100. But most day traders will still be able to make only $5 to $15 per day off this amount with any regularity.

$5,000 in the Account

If you start with $5,000, you have even more flexibility and can trade mini lots as well as micro lots. If you buy the EUR/USD at 1.3025 and place a stop loss at 1.3017 (eight pips of risk), you could buy 6 mini lots and 2 micro lots.

Your maximum risk is $50 (1% of $5,000), and you can trade in mini lots because each pip is worth $1 and you’ve chosen an 8 pip stop-loss. Divide the risk ($50) by (8 pips x $1) to get 6.25 for the number of mini lots you could buy without exceeding your risk. You would break up 6.25 mini lots into 6 mini lots (6 x $1 x 8 pips = $48) and 2 micro lots (2 x $0.10 x 8 pips = $1.60), which puts a total of only $49.60 at risk.

With this amount of capital and the ability to risk $50 on each trade, the income potential moves up, and traders can potentially make $50 to $150 a day, or more, depending on their forex strategy.

Starting out with at least $500 gives you flexibility in how you can trade that an account with only $100 in it does not have. Starting with $5,000 or more is even better because it can help you produce a reasonable amount of income that will compensate you for the time you’re spending on trading.

Minimum Capital Required to Start Day Trading Futures

Futures can be one of the most accessible markets for day traders if they have the experience and trading account value necessary to trade. You can typically start trading futures with less capital than you’d need for day trading stocks—however, you will need more than you will to trade forex. Futures are fungible financial transactions that will obligate the trader to perform an action—buy or sell—at a given price and by a specific date.

Trading futures can provide above-average profits but come at with above-average risk. Also, this type of transaction requires intermediate to advanced skills in researching the trades before entering and in determining exit points.

Futures Brokers, Margin Accounts, and Leverage

Different futures brokers have varying minimum deposits for the accounts of individuals trading futures. Traders will use leverage when they transact these contracts. Leverage means the trader does not need the full value of the trade as an account balance. Instead, the broker will make the trader have a margin account.

Leverage is money, borrowed from the broker. The trader hopes to be able to profit from his futures transaction before the sum is needed to be returned to the broker. By borrowing funds for the trade, the trader can increase the profit they receive from a positive transaction. They also, increase the risk or downside of the trade.

Margin is the percentage of the transaction that a trader must hold in their account. To begin this is called the initial margin, Federal regulations set the minimum margin value as 50% of the total transaction’s cost but brokers and exchanges can set their levels higher if they wish. Also, as time passes, the broker may ask the trader to top off their margin account if the futures price moves against the trade.

As an example, a trader can have $50,000 in their brokerage account, they can borrow another $25,000 in leverage and enter a trade for the total $75,000 less any amount the broker requires they hold in abeyance—reserve—as margin in the account.

Risk Management

Before even discussing the minimum starting capital for day trading futures, risk management needs to be addressed.

Day traders shouldn’t risk more than 1% of their account on any single trade. If trading a $10,000 account, that means the maximum loss a trader should take is $100 on any given trade. That way even a string of losses won’t significantly drawdown account capital.

The risk is determined by the difference between your entry price and your stop-loss order (in ticks), multiplied by the number of contracts taken and the value of each tick. The next section looks at some examples.

Minimum Capital Required

There is no legal minimum on what balance you must maintain to day trade futures, although you must have enough in the account to cover all day trading margins and fluctuations which result from your positions.

Day trading margins can vary by broker. E-mini futures, especially the E-mini S&P 500 futures (ES) typically have the lowest day trading margins, $500 with some brokers. That means the trader only needs $500 in the account (plus room for price fluctuations) to buy/sell one E-mini S&P 500 contract.

Since the E-mini S&P 500 contract is heavily traded, and a highly day tradable market it will be used in the examples below as it is a good entry point for day traders. If a trader seeks to trade other markets, they will need to check the required day trading margin for that contract and adjust their capital accordingly. While broker’s day trading margins vary, NinjaTrader Brokerage provides a list of their current day trading margins. Margin requirements are subject to change.

Capital and Risk

To see how much capital is needed for day trading futures (in this case the E-mini S&P 500) we need to understand the contract and the risk it exposes us to. Futures move in ticks, and each tick movement in the E-Mini S&P 500 is worth $12.50.

Assuming you’ll need to use at least a four tick stop loss (stop loss is placed four ticks away from entry price), the minimum you can expect to risk on a trade for this market is $50, or 4 x $12.50. Based on the 1% rule, the minimum account balance should, therefore, be at least $5,000, and preferably more. If risking a larger amount on each trade, or taking more than one contract, then the account size must be larger to accommodate. To trade two contracts with this strategy, the recommended balance is $10,000.

If your strategy calls for a six tick stop-loss, the risk on the trade is $75 (6 x $12.50). In this case, the recommended minimum balance is $7,500 ($75 x 100). For two contracts it’s recommended you have $15,000, or $22,500 for trading three contracts (based on the six tick stop-loss strategy). Just multiply the risk of trading one contract with your strategy by how many contracts you would like to trade.

While not recommended, the risk level can also be adjusted to allow a 2% risk on each trade. Doing so still keeps risk-controlled and reduces the amount of capital required.

Assume the six tick stop-loss, which puts $75 at risk per contract. If we allow this to be 2% of the account, your balance only needs to be $3750 ($75 x 50). To trade two contracts the recommended amount is $7,500 and to trade three contracts the recommended balance is $11,250. By allowing risk to equal two percent of the account instead of one percent, the recommended day trading account minimum is reduced by half. Risk four ticks per trade and 2% of the account, and you only need to maintain a balance of $2,500.

Some futures brokers require a $10,000 minimum deposit to start day trading futures. Check with potential brokers for such limits.

Final Word

Decide if you are going to risk 1% or 2% on each trade. Ideally, new traders should risk only 1% while traders with a successful track record can risk 2%. If risking 1% and only trading one contract, you’ll need at least $5,000 to $7,500 to start day trading E-mini S&P 500 futures with a four to six tick stop-loss respectively. Willing to risk 2% on each trade? Then those figures can be cut in half.

The tick value and day trading margin for other futures contracts will also affect the amount of capital you need. If trading a different contract, see what the day trading margin is, then determine what your stop loss will need to be to effectively day trade the contract. Then work through the steps above to determine the capital required to start day trading that futures contract.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

Like this post? Please share to your friends:
All About Binary Options Trading
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: