Day Trading Rules on Robinhood
Day trading is not without a certain stigma. The idea that this practice can lead to quick profits leads many to invest large amounts in a short time. Without the necessary knowledge, general losses are exacerbated by day trading. Thus, the Robinhood day trading rule has been put in place to mitigate this issue.
The first Robinhood day trade rule limits traders to 3 day trades within 5 trading days. This is put in place to reduce the risk that certain traders tend to take on, if allowed to engage in intraday trading on a continual basis. Another Robinhood day trade rule only allows investors with a portfolio value of at least $25,000 to partake in this practice more than 3 times within the given window. Again, this acts as a precautionary measure to protect their users.
Types of Accounts on Robinhood
- Robinhood Instant: The first type of account is the Robinhood instant account. When you sign up to Robinhood, this is the default account option. The Robinhood instant account is a margin account and allows for extended trading hours. Robinhood margin trading is in full swing. Customers will have access to instant deposits up to $1,000. This means that deposits or the sale of stock (up to $1,000) will be processed immediately.
- Robinhood Gold: The Robinhood Gold account is similar to the Instant account. However, one will need to upgrade in order to access the Gold account. This account will increase your buying power and provide access to larger instant deposit amounts.
- Robinhood Cash: This is the most basic account that one can access. The Robinhood Cash account allows individuals to place commission-free trades. Trades can take place between standard and extended trading hours. Keep in mind that the Robinhood Cash account will not enable you to access instant deposits or settlements. It is possible to downgrade to a Cash account at any point.
Robinhood Day Trading Restrictions
The Robinhood day trade limitation is put in place to protect customers. As we’ve outlined above, the current restriction allows traders to place 3 or fewer day trades within 5 days. The 5-day window is not necessarily a calendar week. The 5 days might overlap with the weekend. Thus, placing a third day trade on a Wednesday will mean having to wait until the following Tuesday to place another day trade.
Portfolios valued at more than $25,000 are not necessarily subjected to the same Robinhood day trade limit. However, for those portfolios that fluctuate and fall below $25,000, it’s important to adhere to this Robinhood day trading rule. Accounts that place more than 3-day trades within 5 trading days, will be marked for pattern day trading. Accounts marked for pattern day trading will not be able to place a day trade for 90 days. In order to remove this Robinhood day trade limit, the total account equity must exceed $25,000. It is possible to do so by depositing or transferring funds into your Robinhood account.
For those who continue to day trade without increasing their account equity to over $25,000 will face a further Robinhood day trade limit. These traders will be unable to buy stocks and options for a period of 90 days.
How to Avoid the Pattern Day Trading Rule on Robinhood
As we’ve alluded to, it’s possible to avoid the pattern day trading rule. There are two viable ways to do so. The first is by maintaining an account balance of over $25,000. Keeping it a touch over $25,000 will reduce the chances of your total equity falling below $25,000. This tends to happen as market fluctuations and price movements decrease asset prices. Thus, $25,000 is the bare minimum and you’ll be doing yourself a favor by increasing this fractionally over this mark.
Keep in mind that instant deposits do not contribute towards total equity (for pattern day trading purposes). These deposits will need to be cleared (up to 5 business days) before it counts towards your portfolio value. Ensure that all deposits have cleared before engaging in further day trading activities. The second is by utilizing a Robinhood Cash Account as these are not subjected to day trade calls.
How to Use Robinhood for Day Trading
Although there is a Robinhood day trading rule, this doesn’t mean the platform cannot be used for day trading. Following the correct process will allow traders to embark on day trading with relative freedom. Keep in mind the Robinhood day trade limit is there to protect customers who do not have the necessary funds to finance consistent day trading activities.
Robinhood Day Trading Limit
The Robinhood day trade limit will vary depending on the account in question. Each Robinhood day trade limit will be based on a specific start of day value. Then, your Robinhood day trade limit will change throughout the day. This change is based on the order, volume, and type of day trades you make. It’s important to keep in mind that it is not necessarily the number of trades you make that determines your day trading limit. Ultimately, your daily trading limit will be higher if you hold more cash than stocks, or hold low-volatility stocks as opposed to volatile stocks. You can increase your limit by depositing more funds, but not by selling off stocks.
Receiving a Day Trade Call
A day trade call occurs when you exceed your regulatory day trade limit. The Robinhood day trading rule must be adhered to by all traders. Receiving a call means that you’ve not kept within the predetermined guidelines. Thus, your account will be restricted. For a period of 90 days, you will not be able to place day trades. However, you’ll have a window period in which to resolve the respective day trade call before your account is restricted.
Resolving a Day Trade Call
Resolving a day trade call is paramount to reinstituting your ability to place day trades. Or at least avoiding this inevitable scenario. In order to resolve a day trade call, it is necessary to deposit the required funds into your account. The amount will be displayed in the day trade call email, the in-app card, or in your account menu. Once these funds have been settled, you’ll be able to withdraw your funds. The standard settlement period is 5 days.
Day Trading Fees on Robinhood
Opening an account and maintaining your account is free with Robinhood. However, there are certain day trading fees which are passed on by third-party organisations.
The current trading activity fee is $0.00019 per share for equity sells and $0.02 per share for options sells. The fee is no more than $5.95. You might incur a higher fee as the fee is based on the execution of your order, which can occur in multiple parts. The SEC also levies a fee of $22.10 per $1,000,000 of principal (sells only). To find out more about the respective accounts and associated fees, take a look at the latest Robinhood trade fees.
Is Robinhood Good for Day Trading?
Day trading on Robinhood is fairly good. The app provides a decent platform for making day trades while there are enough research and educational tools from which to learn. Keep in mind that Robinhood is geared towards newcomers. Newcomers are not necessarily recommended to jump into day trading from the onset. Therefore, the site is more geared toward long term investing with less focus on the fast-paced world of day trading. The app provides users with automatic notifications prior to reaching day trade limits which is a handy feature. Overall, Robinhood is not the top broker for day trading but continues to expand and incorporate innovative features directed at more experienced traders.
Disadvantages of Day Trading on Robinhood
Day trading on Robinhood has a couple of disadvantages. The site is tailored to newcomers but lacks the financial advisory component that other top brokers offer. Added to which, day trading should not be top of the list of investment strategies for newcomers. The site also lacks in-depth trading products which many traders use for day trading purposes. It’s apparent that the trading platform might not be at the level needed for day trading as great analytical tools and research functions are required. However, it’s not that Robinhood does not provide a useful mechanism for day trading activities. We do believe that Robinhood will continue to grow and improve in this department.
Other Alternatives for Day Trading
There are a number of fantastic online brokers that offer low-cost day trading platforms. One broker that comes to mind is Fidelity. With exceptionally low fees on stocks and ETFs, coupled with a trading platform that is geared towards the active trader, this is a great alternative for day trading. There are a number of other online brokers who also offer decent platforms such as TD Ameritrade. Check out our reviews of the best online brokers to find your preferred day trading platform.
Conclusion
Is Robinhood safe to use when it comes to day trading? Yes, this platform is secure and safe. The fact that there are certain rules and limitations are based on industry-wide regulations. These regulations are put in place to protect traders. Although the Robinhood platform is not our number 1 pick for day trading, it is right up there. They offer all the necessary precautions for newcomers while still catering to experienced day trading professionals.
At BestBrokerReviews.com, we hold online brokers with transparent policies in high esteem. Robinhood outlines exactly what the protocols are surrounding day trading and how to go about avoiding any unwanted restrictions. Just as they provide useful guidance on Robinhood taxes, so do they for a number of interesting day trading topics.
