How to Start Day Trading With $500
Making excellent returns as a day trader typically requires a decent amount of capital to start out, but today we will cover how to start day trading with $500.
So, allow me to preface this article with that disclaimer: it’s quite challenging to multiply any amount of money in financial markets. Day trading is extremely risky and most beginner traders lose money. My results should NOT be considered typical. Since you have a high likelihood of losing money day trading, do yourself a favor and trade in a simulator before you put real money on the line. Do not trade with real money until you’ve proven profitability in the sim.
While growing a small account with a balance like $500 or $1,000 can be more comfortable because there are more opportunities available to you, markets are generally efficient and finding edges is difficult and takes a lot of work and study.
With that out of the way, let’s go over some tips for those beginning to day trade with a $500 account.
Which Broker For a Small Account?
Before all of the major discount brokerages cut their commissions to zero, basically, your only choice for such a small account was a rinky-dink broker like Robinhood. Now, you have several more options with excellent offerings, like TD Ameritrade and Charles Schwab.
Both of these brokers (as well as most other major US discount brokerage firms) have free commissions and sophisticated software packages designed for active traders.
As a day trader with less than $25,000 in your account, you’re subject to the pattern day trader (PDT) rule, which restricts you from making more than three day trades in a rolling five-day period (this restriction can be circumvented by trading with a cash account, but that creates its own issues).
Because of this restriction, those traders who wish to be highly active may opt to use an offshore broker, for which the PDT rule doesn’t apply.
The two offshore brokers that currently offer this are Capital Markets Elite Group and TradeZero. The reason these brokers can skirt the PDT is that they’re not domiciled in the US, and as a result, several US securities regulations don’t apply to them or their clients.
Approach with caution, however, as some of the protections offered to you by US securities regulations may not be present.
What are your intentions with this $500? Do you want to build this account into a larger account quickly? Or do you want to slowly build this account conservatively (possibly depositing more cash as you save up and experience success in your trading)?
I prefer the latter. It’s usually the traders that are most aggressive and excited to multiply a small account that are most uninformed and typically end up losing a sizable portion of their account (if not the entire account) and quickly become demotivated by trading.
Chances are if you only have $500 to trade with, you probably don’t have a ton of successful trading experience, so it makes sense to remain conservative and use your small account as a stepping stone.
It’s imperative not to focus on money at this stage. Make sure you’re making right decisions, that you have a good process, and be patient.
The paradox is that, in trading, when you focus on the money, you usually experience more losses than if you’re process-oriented.
As you build up a sample size of successful trades by playing “small ball” with your account, you can always deposit more cash into your account, but you can’t take back the money you lose in the market.
What To Focus On
As a trader with such a small capital base, I think there are two primary factors to decide on before you begin trading. Those are:
- Which asset class you’ll trade (large-cap stocks, low-float micro-cap stocks, futures, etc.)
- Which types of trading setups you’ll take
First, let’s shift our attention to the asset class you’ll trade.
Which Asset Class to Trade?
With just $500, your choices dwindle quickly. If you’re looking to make meaningful cash returns, you need one of two things: leverage or volatility.
Micro futures are futures contracts that require much less capital than their traditional contract counterparts. For a quick primer on the futures market, check out our Beginner’s Guide to Trading Futures.
For leverage, your best bet is micro futures. Micro futures are one-tenth the size of a standard futures contract, meaning that the required margin for the most liquid futures contracts like the S&P 500 and Nasdaq 100 E-minis are just a few hundred dollars.
Here’s a table laying out the margin requirements for the top micro futures contracts, pulled from TradeStation. The actual requirements will vary by broker, but they’ll all be somewhat similar.
Let’s make this simple to understand. Each futures contract is valued at a multiplier of their underlying. For example, the micro ES contract is worth five-times the value of the S&P 500 cash index (SPX). This means that with $726 of margin, you have access to about $16,500 (based on today’s S&P 500 price of around $3,300).
Futures are definitely the more conservative option of the two asset classes I’m outlining today, but that doesn’t mean that there’s less potential for returns. Although there’s more leverage involved with futures trading, you’re trading stock indexes full of blue-chip companies.
Only in very chaotic circumstances do the indexes make catastrophic moves.
Low-float Microcap Stocks
If you’re seeking significant cash returns from a cash account, your only other option (basically) other than micro futures is the low-float microcap market. This market couldn’t be more different than trading futures but is the one Ross focuses on.
Low-floats are like the wild-west. Every day, stocks are multiplying in value, stock promoters are pumping stocks to enable insiders to dump their shares, and nobody has any stake in the real value of these companies.
Low-floats are much trickier and riskier to trade than futures, but the potential offered is massive if you can trade them skillfully. In the low-float market, news moves markets: press releases, capital raises, and stock promoter email blasts rule the land.
Most of the news is fluff, but the upshot of this is that it’s much easier to know why a stock is moving in the low-float market, even if that move is based on faulty premises.
Low-float microcaps are some of the most volatile securities in financial markets. However, most brokers won’t extend you any leverage to trade these, and will often restrict you from short-selling them, unless you have a broker targeted at short-sellers.
Setups to Focus On
There are hundreds of different trade setups out there, based on candlestick patterns, indicator values, order flow, etc. Ultimately, setups fall into two broad categories: trend continuation and counter-trend plays. Other strategies capitalize on ranging markets. Both are too crafty to trade with a small account.
For a newer trader with a small account, I think it makes more sense to stick with trend continuation plays. In my experience, they’re both simpler to trade and understand.
Within this category, most setups fall into two more broad categories: trend pullbacks and breakouts. A trend pullback setup waits for a pause within a trend to join the trend, while a breakout waits for the market to breach a significant level. That level could be a periodic high or an area of resistance, and it varies case by case.
The first step to trading pullbacks is by identifying a trending market. The most straightforward method of identifying a market trend is by looking for a series of higher highs and higher lows.
Here’s a basic graph to visualize this:
The ideal trend pullback involves you joining the trend on a higher low, and the market continues in your favor with significant momentum.
Beyond simply looking for higher highs and higher lows, we also need a way to quantify the strength of the trend. There’s plenty of uptrending stocks out there that are very slowly increasing by 10% in value over a year, that’s not a very attractive uptrend to look for.
One way of quantifying a trend’s strength is with the use of a momentum oscillator. There are many different oscillators included with each charting package, but they all function similarly: they quantify how quickly the price is moving in one direction.
I like to use two different momentum indicators. The first is called the Average Directional Index (ADX). It’s basically a direction-agnostic oscillator that quantifies how strong a trend is on an index from 0-100.
I use the ADX to strong for stocks in strong uptrends, with ADX values north of 30. The other indicator is a simple MACD. I use the MACD as a tool to gauge how the short-term momentum is looking.
Here’s an example of a stock that I might look for a pullback within:
But I can’t enter yet. I have to wait for a pullback. I prefer to wait for the daily chart to close at or below the 20-day exponential moving average, but there are several ways to skin a cat.
If the stock happens to pullback and closes below the 20-day, it needs to have made a new MACD high during its most recent upswing. As you can see, the MACD just made a new high.
If the stock were to pullback now without making a significant new low on the MACD, I might take that trade.
Breakouts are often the first trade setup new traders are exposed to, and it’s because they’re sexy, and they make sense. Breakouts do offer excellent potential and provide some benefits to learning traders because they present rapid feedback on if the trade worked.
However, the fact is that most breakouts fail.
Here’s some data on the failure rate of breakouts from Thomas Bulkowski’s Encyclopedia of Chart Patterns:
While sacrificing win-rate, the winning breakout trades often do turn out to be huge gainers, so they’re worth paying attention to.
The strongest and most high probability breakouts typically form a strong base (a tight, upwardly trending price range with low volume), experience high relative volume at the breakout point, and don’t return to pre-breakout levels before continuing upward.
With such a small account, you have no safety blanket by which to support a string of losing trades. For this reason, there is an element of luck at play with growing a small account. Sometimes you can make all of the correct decisions and still make a considerable dent in your account size.
In order to reduce your risk ruin, it’s vital to cut your losses quickly and set stop losses intelligently. I prefer to use a stop-limit order in this situation, in which your actual stop price is well below the level where you tell your broker to “activate” your stop loss, as to reduce the risk of the stock gapping through your limit order.
It may increase slippage, but it’s better than getting gaped on.
Daily or Weekly Stop Point
Many successful traders make use of daily or weekly stop points. Basically, when they lose a given amount of money in a day or week, they stop trading for the rest of the day or week. They recognize that the cards are not in their favor on that day and don’t continue making losing bets.
Growing a small account is tough. The industry is created to favor those with a lot of capital, but building a small account isn’t impossible, and many have done it.
It’s also great to view your small account as a starting point. A proof of concept, through which, if you can prove that you can make good trades with, you can continue depositing cash to grow your account size and make things easier on yourself.