Day traders suffered a devastating blow in 2001 when a new US law was passed restricting the way stock could be actively traded.
The law basically required stock traders to have at least $25,000 in their accounts if they wanted to participate in day trading on an ongoing basis. In essence, this purged many day traders from the market, since most were trading with less than $25,000.
Even after this law was enacted, some people with less than $25,000 in their accounts still argued that they continued to day trade stocks. The reality is that these people are not literally “day trading” (they can’t – it’s illegal!). They are actually holding stocks for more than a day; in other words, short-term trading (not day trading).
From my previous explanations, I have demonstrated why doing this is so risky. Since the trader cannot liquidate his positions when the stock market is closed (outside of the after-hours and pre-market trading sessions), he is exposed to potentially catastrophic losses. A stop loss is useless in this situation.
So what can an active trader with less than $25,000 do?
One option is to trade currencies (Forex).
You can day trade currencies with a lot less than $25,000. In fact, you can trade them with as little as a few hundred dollars.
Furthermore, the Forex (FX) market is open from Sunday around 4 PM EST to Friday around 4 PM EST – so a trader can day or short-term trade (based on his preference) with an active stop loss most of the time. In the not too distant past, only banks and wealthy individuals and institutions could trade currencies, but now, thanks to the internet, small investor can participate. Some of the major advantages of trading euros and yen over stocks are:
- More flexible trading hours – Currency trading goes on from Sunday afternoon to Friday afternoon, so for 5 days of the week you can day trade all day long. The FX market does not close every day like the stock market. This basically allows the day trader to choose the hours that he is going to participate with a greater degree of flexibility.
- Flexible leverage – Stock day traders (with more than $25K in their accounts) have an intraday margin of 4 to 1. This basically means that they can trade $100,000 worth of stock with only $25,000. Short-term stock traders (those who hold stocks overnight) only have 2 to 1 margin. As a currency trader (whether day trading or short-term trading), you have 50 to 1 leverage or more (as high as 500 to 1!). That means that I can move at least $1,250,000 worth of currencies with just $25,000 in my account. A big difference! Please note that using leverage can cut both ways. Leverage multiples the gains as well as the losses of the underlying investment, so please be extremely careful when using it. In general, most professional traders do not use more than 20 to 1 leverage.
- Less starting capital required – As I mentioned before, if you want to start trading but don’t have $25,000, don’t worry. A Forex account requires only a few hundred dollars to get started.
- Less currencies to follow – There are only a handful of major currencies to trade. This simplifies things quite a bit. On the other hand, there are tens of thousands of stocks out there. How do you choose which stock you are going to trade? It is much simpler to choose among a few currencies; at least in my opinion.
- More liquidity – Whatever we are trading has to have enough volume to make it worth our while. Greater volume means that there are more people willing to buy and sell something at any given time. By some estimates, the currency market is more liquid than all the world stock markets put together.
- Free trading platform – A top of the line direct access trading stock platform, like RealTick, costs a good amount of money a month (you should never actively trade stocks with a regular online broker). There is plenty of great Forex platforms out there that are free to use. This lowers the day trader’s costs (click here to sign up for a live trading simulator).
- Less restrictive for shorting – There are artificial controls built into the stock market to prevent it from going down too fast. The reason is that we live in a biased world that likes to see things go up instead of down. One of these artificial contraptions is the “uptick rule,” which comes into play when shorting stocks, making it more difficult to sell a stock short than to buy it. This is unheard of in the currency market. Selling currencies short is just as easy as buying them.
- Great for short-term traders – For those that like to hold stocks for a few days, currencies might be a good fit. Since the Forex market is opened 24 hours a day for 5 days a week, a currency trader that wants to hold a position from one day to the next (or for a few days), can do it with an active stop loss order in place.
If you are a day trader or you think active trading is for you, I recommend you consider currencies. You can sign up for a demo of a live simulator I recommend for free (see short form in upper right of this page). If you decide to start trading for real after that, the trading platform is still free (unlike some advanced stock trading software suites in the market). As I mentioned in the paper trading section, using a demo or simulator is a great way to learn how to day trade.
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