Funding Your Account If You Are A Day Trader

Day trading is one of the hardest ways to make a living.  Notice I did not say "Full Time" day trading.  If you try to day trade part time, such as a couple days a week or when you have free time at your regular job, you will probably lose money.  If you want to day trade, you need to commit to it full time.  If you can't, then stick to swing trading.

Since your job as a trader is to PROTECT YOUR CAPITAL, novice day traders should not commit more than $30,000 of capital to your trading account.  The rest of your trading capital should be in a liquid investment like a money market.  Why so little?  Current rules for a pattern day trader require that you have a minimum of $25,000 in your trading account.  Add an additional $5,000 to this amount for a total of $30,000 which will give your account some room to move with the ebb and flow of the market.  If your account balance drops below $25,000 you will not be able to trade from the account until it's balance is brought back to over $25,000.  Why is this important?  It's important because most novice day traders will lose money in the beginning and the will not have developed the discipline to stop trading on their own when they hit a losing streak.  By limiting your account funding in the beginning, you broker automatically stops you from trading and this will help you to develop the discipline to stop trading on your own.

So what should you do if your account goes below the $25,000?  You should stop trading for a couple of days, review your trading plan to see where it needs to be modified and then, and only then add additional funds to your account to bring it back up to $30,000.  During your first few months as a day trader, only trade 100 shares at a time with a maximum share price of $50 per share and only trade 1 position at a time.  This will PROTECT YOUR CAPITAL by allowing you to focus on only one trade, and by limiting your position size to 100 shares will minimize your draw downs as you will not have a lot of capital at risk.

Your next question should be "What should I do if I am making money?"  If your account increases to $35,000 within the first 12 months you decrease it back to the original $30,000.  This forces you to book profits.  Keep decreasing your account to the $30,000 each time it reaches $35,000 within the first 12 months you are a day trader.

Your final question should be "When should you add additional funds to your trading account?"  If after 12 months you are a successful trader, you should add $5,000 per month for each month that you are profitable in the 2nd year of full time trading assuming you have the additional funds.  In the 3rd year of full time trading, you should add $10,000 per month for each month that you are profitable again assuming you have the additional funds.  During the 2nd and 3rd years, if you have a losing month, you should withdraw either $5,000 or $10,000, depending on the year, in the subsequent month.  If you have consecutive losing months, you should not add additional funds until you have consecutive winning months.  After the 3rd year, divide your remaining trading capital by 12 and add 1/12th to your account each month based on rules above.

THe bottom line to all the rules above regarding funding your day trading account is that it PROTECTS YOUR CAPITAL while you are learning to be successful, PROTECTS YOUR CAPITAL when you hit the inevitable losing streak and increases your capital as you become more successful.