Virtually any type of investing involves a healthy amount of risk, but sitting at the top of the risk pyramid is a trading practice referred to as day trading. It’s high risk because it involves rapid-fire trading in pursuit of a large number of successful trades – which is hardly guaranteed – and is often done in conjunction with margin trading.
In this guide, we’re going to provide a list of what we believe to be the five best brokerages for day trading. That’s important because the brokerage platform a day trader operates on is mission-critical to successful trading.
Day trading is a classic high risk/high reward type of trading. Because it seeks to exploit very short-term fluctuations in security prices, it’s not an investment strategy in the strict sense. The day trader isn’t looking to hit a home run with a single trade. Instead, he or she makes multiple trades within the same day, in pursuit of very small percentage gains on each.
The basic idea is that multiple trades – even allowing that some will go in the wrong direction – will produce a positive overall return over the longer term. In fact, day trading may be thought of more as an occupation than an investment strategy. It’s very hands-on, requiring constant attention to the trader’s active positions, as well as any securities the trader may be tracking for future trades.
The strategy gets its name from the fact that trades are typically completed within the same day. The day trader may purchase a stock at $71 in the morning, and sell it at $73 in the afternoon, reaping a 3% profit in a single day on a single trade.
Naturally, there’s tremendous potential for any trade or trades to go in the wrong direction. As a result, day trading is regulated by the Financial Industry Regulatory Authority (FINRA), which issues specific guidelines for the practice.
FINRA specifically identifies day trading as “pattern day trading”. That refers to a margin customer who day trades four or more times in five business days, provided the number of day trades are more than 6% of the customers total trading activity for that same five day period.
Below is our list of what we believe to be the best brokerages for day trading:
Why Robinhood is a good choice for day trading: Robinhood is a trading app designed specifically for young, self-directed investors. Day trading is one of their featured services. They even provide qualified investors with up to 4X margin for day trading. However, the app Is limited on both customer service and investment tools. You’ll need to use outside services, like stock screeners and research sources.
Why Webull is a good choice for day trading: Much like Robinhood, Webull is an investment app that fully accommodates day trading. It gives you access to charting with 25 technical indicators, as well as earnings calendars, capital flows, press releases, advance quotes and more. Webull also provides margin leverage with 4X day trading buying power, and 2X overnight buying power. They also offer a virtual account where you can test your trading skills before going live with real money. But it’s still a relatively light platform, requiring use of third-party services for successful day trading.
Why Firstrade is a good choice for day trading: Firstrade can accommodate day traders, but they do offer much more limited margin buying power. They require investors to have a minimum equity of 50% in any position, which effectively translates into 2X leverage. That won’t be a problem if you plan to engage in day trading with less leverage. If you do, Firstrade does provide more investment tools and research information than either Robinhood or Webull. They also offer commission-free trading in thousands of mutual funds if you have an idea to add those to your day trading activities.
Why Charles Schwab is a good choice for day trading: In many regards, Schwab is a top-of-the-line investment brokerage platform. They offer every possible investment service, including three free trading platforms, 24/7 customer service, local branches, a wide range of online trading tools, and information provided by some of the top investment services in the world. Schwab does accommodate day trading, but it’s more limited than what’s available on Robinhood and Webull. Like Firstrade, margin leverage is limited to no more than twice your account equity. But it’s an excellent platform if you can live with the reduced margin capability.
Why Fidelity is a good choice for day trading: Typically matching investment services with Charles Schwab – Fidelity’s primary competitor – they also offer day trading. But again, it’s not a primary function of Fidelity, as they don’t offer as much margin leverage as other investment apps. Still, Fidelity is one of the top trading platforms in the industry, offering 24/7 customer service, hundreds of branch offices around the country, and some of the best tools and research available in the investment industry.
If you’re contemplating stepping into day trading, the investment platform you choose to work with will be critical. The five brokers above are among the best in the industry, with Robinhood and Webull being particularly well-suited to day trading.
Since day trading involves generating multiple small gains, traders often take advantage of margin investing in the process. Margin involves borrowing funds from the broker to increase the trader’s buying power.
Continuing the example from above, if the trader were to invest $2,000 purchasing a stock in the morning at $71, then selling it in the afternoon at $73, he’d have a gain of $56 on the trade.
But if he uses margin to double his purchase to $4,000 the gain also doubles – to $112. That’s a return of more than 5 ½% on the trader’s cash investment. And with margin interest rates being in single digits, the daily interest cost of the margin trading will be insignificant.
That’s why margin trading is such a big part of day trading.
But FINRA recognizes the additional risk posed by combining day trading with margin trading. They require that a day trader maintain a minimum account equity of $25,000 on any day the customer trades. If your account balance falls below that threshold, you won’t be able to day trade until the minimum requirement is restored.
The rules also permit a pattern day trader to trade up to four times the maintenance margin excess in the account as of the close of business of the previous day. A margin call will be imposed if the trader exceeds the day trading buying power limit. Otherwise, the trader will be limited to no more than twice the maintenance margin excess. If a margin call is issued and not met, the trader will be required to trade on a cash basis for 90 days until the margin calls is met.
Day trading is a highly sophisticated strategy. It involves working with a brokerage platform that can accommodate the needed trading tools and resources, as well as margin capabilities. If trading tools are unavailable on the platform itself, the day trader will need to use third-party services, like stock screeners and other tools.
These are necessary because the day trader must be able to track security prices in real time, and on a continuous basis. That ability is what enables the day trader to both spot price patterns and determine opportune times to buy and sell.
Speaking of selling, in addition to buying stocks to take advantage of price increases, day traders also engage in short selling. That’s where the trader sells a stock at a given price, then delivers the stock after the price has fallen. The trader’s profit is the difference between the initial sale price of the stock and the buy price. It’s a typical stock trade done in reverse, but it can be just as effective as a traditional buy-and-sell.
As you can probably (and hopefully) tell, day trading is not for the faint-of-heart. It involves a strong combination of trading strategies, trading discipline, and the courage to engage in a higher risk financial activity.