Day Trading In The US 2024
Day trading in the US is a popular form of speculative trading. A day trade occurs when an investor opens and closes a position within the same day, profiting from short term price fluctuations. The main advantage of day trading is that you avoid overnight negative price gaps and holding fees. This guide will explain the key details of day trading in the US, including legality, regulation and how to choose the best brokers.
Top 3 Brokers in the US
What Is Day Trading In The US?
The Securities and Exchange Commission (SEC) defines a day trade as a position that is opened and closed in one trading day. Day trading in the US became popular after the 1975 deregulation of commissions in the United States. The advancement of electronic and mobile trading platforms has seen this popularity surge in recent years.
Day traders in the US have access to a wide range of instruments on stocks, forex, commodities, crypto markets and more.
Is Day Trading In US Stock Markets Legal?
In the United States, there are restrictions on day trading stocks. Individuals defined as pattern day traders (PDTs) need to maintain an equity balance of at least $25,000 in their trading account. Pattern trading is defined by the Financial Industry Regulation Authority (FINRA) as four or more leveraged day trades within five days that exceed 6% of the account’s value. That being said, brokers offering day trading in the US may impose their own, stricter definitions of pattern trading. You can avoid complications and having your account closed by checking the requirements set by your broker and sticking to them.
These PDT rules only apply to day trading in US stocks. The USA futures and currency markets do not have minimum equity requirements. However, individual brokers may set minimum deposit limits and margin restrictions. Maximum leverage rates for US day traders are 1:4, whereas those holding positions overnight are limited to 1:2.
Day trading in US equity and derivative markets is not limited to US citizens. Foreign traders will have to pay taxes differently from their local counterparts but the PDT restrictions still apply. The most important consideration for those wishing to trade US stocks, whether from the UK, India, Canada or the US, is selecting a reputable, regulated broker.
How To Start Day Trading In The US
To get started day trading in US markets, you should follow this step-by-step guide:
Choose A Broker
Perhaps the most important decision for prospective day traders; there are several key factors to consider when choosing a broker:
- Regulation – If you are a US resident, choosing a broker that is regulated by CFTC, NFA or FINRA (Financial Industry Regulatory Authority) will protect your investments and help ensure all business is above board. In the case of errors or faults causing losses when day trading in the US, you may be able to file a suit against the company.
- US Dollar – When day trading in the US, you will likely want to execute trades in the US dollar. This will avoid currency conversion fees. Fortunately, USD is an extremely popular currency and most reputable brokers around the world offer accounts with USD as a base currency.
- Platforms – Your strategy and frequency will determine which day trading platform is best suited for your needs. If you are day trading in the US in volatile markets, like Bitcoin or exotic forex pairs, you may want to find a well-designed mobile app that will regularly update you on price fluctuations. However, if you prefer day trading with stocks in the USA, you might prefer more advanced platforms like MT4 or MT5.
- Fees & Payments – If you are considered a pattern day trader in the US, you will need to maintain an equity balance of $25,000. Brokers will set their own minimum deposit amounts and may have varying charges such as withdrawal fees. There is a lot of competition, so take your time to compare fees before you begin day trading in US markets.
- Market Access – Individual brokers will allow day trading with different assets and may impose limitations on specific securities. Markets for day trading in the US include stocks, futures, forex and cryptos with brokers like Binance. Day trading CFDs in the US has some restrictions and not all brokers offer it.
- Day Trading Features – The best brokers for day trading in the US will offer fast trade executions and trade automation. A demo account can also be useful if you are looking to practice new strategies with zero risk.
Analyse The Market
You will need to choose which markets you want to day trade in and which assets could be profitable. For example, you can find the best stocks for day trading in the US by analyzing their volatility and previous price fluctuations. For this, you can use the tools offered by your broker, like candlestick charts. Consulting posts in US trading forums, Discord and social media can give you an idea of what other traders are interested in.
Open A Position
Once you find an asset that you believe will be profitable, you can open a position; go long if you think it will increase in price or go short if you think it will decrease. You can use leverage to improve your profits and set stop orders to limit your losses.
Monitor Your Position
Because day trading in the US is a short-term strategy, every action and price movement counts. Keep an eye on the market and on the news for possible opportunities to close your position profitably or get out before it fails.
Close The Position
If you are satisfied with the profit on your position, you can close it as soon as you want, even if it has been only minutes since you opened it. Conversely, you can exit your trade if you have reached your maximum acceptable loss for the position. Remember, you will need to close your position before the end of the trading day – this means you need to manage risk carefully.
Day Trading In US Strategies
To maximize your profits when day trading in the US, it is key to have a consistent strategy for managing risk. Here are two strategies that you can use:
Scalping
Scalping is a popular strategy for day trading in the US, in part due to the ease with which it can be automated. However, it is a demanding strategy when performed manually, requiring strict risk management and quick decision making. Scalping involves closing an open position as soon as it becomes profitable, usually within a few minutes. While scalpers may only take a small profit from each trade, it can be magnified by increasing trade sizes and frequencies or incorporating leverage.
Scalping trades follow certain steps:
- Define your closing parameters. For example, 0.5% profit and 0.3% loss limits. This means that once these thresholds are reached, no matter what the market looks like, the trade is closed.
- Find a volatile asset; forex and cryptos are particularly good for scalping.
- Identify an entry point. For example, the Tesla share price is $600.00 and you think it will increase, so you go long for 100 shares ($60,000).
- Calculate 0.5% of $600.00 ($3), this is the profit point at which you will sell. Likewise, the loss exit point would be $1.80.
- Once the share price reaches $603.00, exit the position and walk away with $60,300, a $300 profit.
- If the share price drops to $598.20, then your loss limit has been reached and you should sell.
- With this model, even if your win rate is only 50%, you will aggregate profits over time.
Following The Trend
This day trading in the US strategy, sometimes called momentum trading, involves finding assets with clear trends and following that trend. Trends are often motivated by news articles, product releases or even celebrity tweets.
The first step is to identify a trend, this is often either from an asset’s chart or an event that you think will trigger a trend in a particular asset. For example, if a famous company just announced they are buying a particular startup with good media coverage and sentiment, you may think it likely that the share price of that company will go up. You would then buy some shares and sell once it looks like the trend is reverting.
Day Trading Taxes In The US
Taxes when day trading in US markets can be complicated and you must accurately report your profits and losses. The profits you earn as a day trader typically falls under short-term capital gains. The net capital gain is taxed together with other sources of income. This means that if you have a job that pays $40k a year and you earn $15k for day trading in the US, you will be taxed according to $55k. These tax implications of day trading in the US apply to all markets and trading actions, including the taxes for profits on crypto day trading.
If you are a full-time trader, you might qualify for Trader Tax Status Designation. This allows you to discount business expenses from your income and other tax benefits, but it needs to be granted by the Internal Revenue Service (IRS).
If you are not a US resident but are trading with US stocks, you will not need to pay US capital gains tax but you will need to pay taxes in your country of residence. Some brokers might require extra documentation to prove your address or tax status.
Whether you are a US resident or not, consider consulting a local tax advisor to understand your options and obligations.
Final Word On Day Trading In The US
Day trading in the US is an exciting form of investing that can produce great benefits if you have strict risk management skills and a strong strategy. Choosing a broker is a vital consideration and should be done according to your strategies, asset requirements and goals. It is also important that you follow the day trading regulations and laws in the US so that your funds are protected and you are trading legally. Our reviews of day trading brokers in the US can help kickstart your journey to becoming a day trader.
FAQs
What Is Day Trading In The US?
Day trading is a form of speculative trading in which a trader opens and closes positions within the same trading day. Traders can profit from small fluctuations in asset prices, but it is important to manage risk carefully.
Is Day Trading Illegal In The US?
No, most forms of day trading are legal in the US. If you trade stocks regularly, you are legally required to maintain an equity balance of at least $25,000 in your trading account.
Can I Day Trade US Stocks If I Am Not A US Citizen?
Anyone can day trade stocks in the United States of America, even non US citizens, by using international brokers. Make sure that your broker of choice is regulated for increased fund protection.
Do I Need To Pay Tax For Day Trading In The US?
Yes, you will need to pay tax on your day trading profits. These profits are considered capital gains and are added to your other sources of income for taxation. Tax laws will vary based on where you are trading from; be sure to carefully research the issue or consult a tax professional.
What Markets Can I Day Trade In The US?
In the US, you can day trade on stocks, futures, forex, commodities, crypto markets or indices, such as the US 30.