Warrior Trading Blog

Day Trading With Robinhood: Is It a Good Idea?

day trading robinhood

Day Trading With Robinhood

Robinhood exploded on the scene when they first entered the brokerage industry. They were the first large broker to offer commission-free trades and created the most user-friendly mobile app for trading stocks. 

This massive competitive edge allowed Robinhood to gain huge market share with millennials, a demographic that big brokers historically had trouble attaining.

 Many of Robhinhood’s young clientele quickly become enamored with day trading. (1Day trading is when you buy and sell the same security within one day. If I buy Apple stock at 10 AM and sell it an hour later, I’ve made a day trade.) 

Robinhood traders love day trading because, to them, it’s partly a game. Then Robinhood makes efforts to ‘gamify’ the trading and investing experience, making it similar to a mobile game. 

Robinhood traders also have small accounts and know that buying index funds with $2,000 won’t create impressive gains. According to a study from JMP Securities, the average Robinhood client has between $1,000 and $5,000 in their account, compared to Charles Schwab, which has an average of $240,000.

Many view day trading as the only way to make their small account meaningfully grow. 

Can You Day Trade With Robinhood?

Yes, you can day trade on Robinhood.

Functionally, it works the same as investing does. You buy a stock through the app, and then you sell it later on in the day. There’s no day trading feature or switch to click in the app. 

PDT Rule

However, those wanting to day trade should know a few things first—namely, the Pattern Day Trader (PDT) rule. The PDT is a regulation that prohibits traders with less than $25,000 in their accounts from making more than three day trades in a rolling five-day period.

Keep in mind that the five day period is a rolling period. This means that if you make a day trade on a Tuesday, it will count against your day trade number until the following Tuesday.

The regulation is dumb, but all US brokerages are required to follow it, so it’s just something to adapt your trading strategy to. This means no scalping or highly active trading strategies with your small account.

Order Types

Another thing to be aware of is order types.

Many Robinhood day traders are pretty new to the stock market. They are unfamiliar with the functions of different order types. 

The default order type in the Robinhood app is a market order that buys whichever shares are available at that time. Market orders can lead to your order getting filled at an undesired price. 

Robinhood only offers a few order types, and the most important is the limit order. The limit order allows you to tell Robinhood, “I want to buy this stock at $X and under.” This prevents you from paying more for a stock than you planned to. 

When trading large-cap names like Amazon or Apple, you won’t notice a considerable difference between limit orders and market orders. Still, limit orders become very important when trading penny stocks, which can have very wide bid-ask spreads.

Pros and Cons of Day Trading on Robinhood

While the pretty UI and trendiness of Robinhood can reel you in, you need to remember the classic quote, “if it’s free, you’re the product.” In other words, “there’s no free lunch.” 

Let’s take a look at some of the things Robinhood has going for it first.

User Friendly

Robinhood is credited with democratizing investing and trading. They created a user interface that almost anyone can understand and interact with. This cuts out a lot of the formalities traditionally associated with making a stock trade. 

Through this low-friction approach, Robinhood has undoubtedly given many future hedge fund managers an accessible introduction to the stock market. 

While this attribute is listed under the pros, it can also be a drawback.

The simplicity of making a trade can deceive many into believing that profitable trading is easy. The company has faced a great deal of criticism for this. 

No Commissions

The lack of trading commissions used to be the leading benefit of Robinhood as a platform.

However, the rest of the industry has since responded to Robinhood’s disruption by cutting their commissions. All of the top discount brokerages: Charles Schwab, E*TRADE, TD Ameritrade, and Fidelity also offer commission-free trading. 

Great Mobile App

From a pure ease-of-use and UI standpoint, the Robinhood app blows the rest out of the water. If you quickly need to enter or exit a trade on-the-go, it can’t be beaten. 

The app is lacking in analytics, though. The charts are pretty weak compared to the thinkOrSwim app, offered by TD Ameritrade. 

Decent Margin Rates

At the time of writing, margin loans through Robinhood Gold are a decent deal, boasting cheaper interest rates than many of their competitors like Schwab and E*TRADE.

Robinhood charges 5% for all margin loans above, $1,000. The first $1,000 of margin costs a flat fee of $5, regardless of whether you use it. 

Now let’s get to the drawbacks of Robinhood.

Better Brokers Also Offer Free Commissions

Like I mentioned earlier, the largest discount brokers now offer commission-free trading. Almost all of these brokers have sophisticated desktop trading software, offering high-quality charting, screeners and scanners, and news. 

For example, TD Ameritrade, who offers free commissions, provides all clients with the thinkOrSwim platform for free. This platform is widely regarded as one of the best pieces of free trading software. It is loved even by highly experienced traders.

Robinhood simply doesn’t offer this level of technology to their clients.

Selling Order Flow

Almost all big brokers, except Interactive Brokers (sans their IB Lite program), sell your order flow to high-frequency traders. This means that big HFT firms like Virtu Financial pay brokers to route your order to them before it ever reaches a stock exchange. 

However, HFT firms REALLY like Robinhood traders. They pay Robinhood as much as 10x what they pay other discount brokers for the same amount of volume, according to a report from Logan Kane. 

This is likely because the HFTs know that Robinhood’s clientele is generally less-informed than your average trader at Schwab or Fidelity. But it’s also likely because of the way Robinhood’s app has market orders as the default order type. According to Dennis Dick, a proprietary trader with Bright Trading, market orders are more profitable for HFTs. 

Charging for Basic Features

One of Robinhood’s primary sources of revenue is its Robinhood Gold subscription service. Gold allows investors to use margin and access analytics like Morningstar research reports and Level 2 market data. 

The problem with Gold is that Robinhood’s competitors offer the same features for free. Most discount brokers like Schwab offer free research reports, trading software, and other resources, even to clients who haven’t made deposits.

Shoddy Customer Service

Brokers like Fidelity, Interactive Brokers, and Schwab offer excellent customer 24/7 support. Unless a market crash is unfolding, it generally takes little time to get on the phone with a licensed broker. 

If you Google search “Robinhood customer service reddit,” you’ll find droves of reports of Robinhood clients complaining of the company taking several days to respond to support claims, or waiting on hold for over an hour to reach a representative.

According to PissedConsumer, just 1% of complaints reported getting through to a representative when seeking support.

Limited Asset Classes

At the moment, Robinhood only offers stocks, options, ETFs, and crypto. For most, this is enough. But most serious traders test several different strategies across a range of asset classes.

Robinhood doesn’t offer futures, mutual funds, bonds, forex, spot commodities, or warrants. Interactive Brokers is an excellent example of a broker offering almost all asset classes to retail investors.

Robinhood Fees

One of the great things about Robinhood is they’re pretty barebone when it comes to most fees. They don’t charge commissions for any trades, and their Robinhood Gold pricing structure is transparent. 

Robinhood used to have a more complex pricing system for Gold, but now all Gold members pay the same $5 per month and are charged a 5% interest rate for any capital they borrow.

 Robinhood also has some “hidden fees” for miscellaneous transactions, like the following: 

  • $75 account transfer fee
  • $5 paper statement fee
  • $50 commission for foreign securities, $35 for Canadian securities.

Many other brokers also charge similar fees for account transfers and foreign securities.

Day Trading Alternatives to Robinhood

The day Charles Schwab cut their commissions to zero, which sent the rest of the industry to follow, Robinhood lost its leading competitive edge. Competing on price is always a race to the bottom. 

If you want to take day trading seriously, you need the right tools to do so. You need high-quality charts with quality data feeds. You need a comprehensive stock screener that allows you to search for trade opportunities for several different strategies. 

Most of all, you need to be trading on a computer, not a phone. And Robinhood Web doesn’t cut it. While it looks pretty, all that fancy JavaScript just makes things slower. The best trading software, believe it or not, is simple and looks like it comes from 2003. This allows for low-latency trading, with no added fat to slow things down. 

Most of the top brokers offer free software to active traders. They’re all pretty good, but I’m partial to TD Ameritrade’s thinkOrSwim. The platform has some of the best charts in the game, is loved by options traders for their options table layout and options analytics, and is friendly to several asset classes. 

Charles Schwab’s StreetSmart Edge is also respectable, although it’s more or less a watered-down version of thinkOrSwim. You’ll find most active trader platforms from brokers like Fidelity or E*TRADE meet these criteria. They’re all pretty solid, but they’re decisively second to thinkOrSwim. 

TradeStation offers excellent tools to algorithmic or quantitative traders. They’ve built their own programming language called EasyLanguage, which is notoriously easy to learn, for clients to develop strategies to backtest or trade live. 

For those who prefer a mobile-centric broker, Webull is a new broker following the same millennial-focused strategy as Robinhood, but they’re arguably doing it better. Their web platform is pretty decent, and their mobile app is almost on the same level as Robinhood when it comes to UI and ease-of-use. 

Bottom Line

Robinhood certainly has its place in the finance world, but their competitive advantage is eroding each day. As soon as the brokerage industry cut their commissions to zero, it became difficult to justify using Robinhood over one of their competitors. 

Day traders need high-quality charts, screeners, and programmable hotkeys. Robinhood offers none of these.

The platform is great as an entry-point to the stock market, but it makes sense to jump ship as soon as you have any trading know-how. 

In February 2020, the company launched Profiles, a social network for investing. It allows users to set ‘buy’ or ‘sell’ ratings on stocks and analyze each other’s holdings. While the platform isn’t suitable for advanced traders, this feature seems like a promising onset for growth.

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