From a mathematical standpoint, it is not common for a traditional equities trader to have a return of more than 20% annually, though some strategies can have higher returns and some can have lower returns. If a trader has a buying power of $50,000 and returns 20%, they will profit $10,000 for the year. Ideally for every $50,000 more in buying power, the trader will profit $10,000 more. A trader can calculate his expected return on his strategy and divide that by his desired profits to calculate the total buying power he needs.
To trade an account marked as a pattern day trading account, a trader needs a minimum equity balance of $25,000. This can be a significant encumbrance and many traders do not have the starting capital required by law to maintain a pattern day trading account. Traders can fund a day trading account which will not be subject to the $25,000 minimum if they open an account with a proprietary trading brokerage. This can usually be done with a minimum investment of $2,500 but it depends on the brokerage and their requirements. A proprietary brokerage is one way traders can access significant buying power to increase their returns.
A better way is through something called a binary options brokerage account. This is an account that allows traders to return over 80% per trade on winning trades, but the downside is a trader will lose 100% of his money in the position on losing trades. A trader must be correct over 50% of the time to make money, but the start up costs are extremely low at a $250 minimum, and the potential for large profits are enormous. We are recommending that traders without a lot of start up capital but who can make money use binary options to increase their account values more quickly than traditional equity trading. Open an account with us and you will receive extra benefits as well.
The SEC mandates that any retail trading account which places and closes 4 trades within a 5 day period must be marked as a pattern day trading account. The SEC views day trading as especially risky, and the equity minimum is a way to qualify prospective day traders as those who understand and are financially able to bear the risk.
The SEC requires that any account showing pattern day trading activity be restricted for 90 days from entering into any new positions if they there is not $25,000 of equity in the account. Traders will still be able to close out positions if they wish during that time. From an account funding perspective, in practical terms a trader needs to fund an account with at least $35,000. If the account equity drops below the $25,000 threshold at any time trading will be restricted. An account funded with the minimum $25,000 will have no room for any drop in equity before the restrictions are put on the account.
It should be noted that if a person buys a position with multiple buy orders, or exits a position with multiple sell orders, this is still only considered one trade. For instance, if a 500 share position is entered into with 5 separate 100 share executions, and then exited with 2 separate 250 share executions the same day, for the purposes of the pattern day trading rule this is only considered one day trade.
Having enough capital to put into a day trading account to avoid the pattern day trading restrictions is not a barrier for some people, but for others this is too large an investment to make. Even if a trader is able to fund an account with this much money, it still exposes them to a lot of risk. All of the money in the account used to trade with will be at risk, and if you trade with margin the risk exposure is even potentially greater.
The only way for a day trader to consistently place day trades with an account equity of less than $25,000 is to open a proprietary brokerage account. A proprietary brokerage is one that specializes in day trading, and most accounts are not subject to the pattern day trading rule. This is because it is understood that proprietary traders understand the risks of day trading. Traders can often also keep less total capital at risk by funding an account with a fraction of the total equity needed for a retail day trading account, and have access to firm capital so their buying power will not be limited.
A trader can usually fund an account with a proprietary brokerage for a $2,500 minimum but this can vary amongst brokerages. The brokerage can then provide buying power in whatever amount they feel comfortable granting the trader. Usually a $2,500 investment will result in an initial buying power of $25,000 to $50,000, and the brokerage can raise this on a case by case basis if the trader proves themselves profitable and responsible in managing risk. Traders can of course invest greater amounts and have access to higher initial buying power. The downside to using firm capital is that the brokerage will normally take some percentage of total profits in a profit sharing arrangement with the trader. This normally ranges from the trader keeping 70% to 99% of their total profits, depending on experience and profitability.
The good part of this arrangement for the trader is the low funding costs and that the amount of money at risk in the account can be relatively very low to them compared to retail day trading accounts. Proprietary brokerages also usually offer advantageous resources to traders such as better trading software and extra buying power.
The only requirement for opening a proprietary brokerage account is for traders who are based in the United States. US traders must pass their Series 56 exam to register with a proprietary brokerage. Foreign traders are not subject to this rule and can register without a Series 56.
It is also worth noting that if you have a margin account with any major retail brokerage such as E-Trade, TD Ameritrade, Interactive Brokerage, or any non-proprietary trading firm, you would be responsible for any loss that exceeded your account equity. So signing up with a good proprietary trading firm is an excellent way to control your maximum loss, as well as to increase your gains by using the leverage they provide.
At How We Trade, we trade with one of the largest and most reputable firms in the industry. Traders can open an account with as little as $3,000 and they are not subject to the pattern day trading rule. Traders are given firm buying power which is expanded as they earn the right to use increasing capital.