The pattern day trader rule makes it difficult for traders with less than $25,000 in their account to day trade equities, ETF’s or options on either. The rule allows traders with less than $25,000 to make no more than four round trip day trades in a 5 day period. If they make more day trades than this their account will be restricted to closing positions only until they are able to bring their account equity above the $25,000 threshold. For traders who want to day trade indices or commodities they can choose to trade futures but there is a drawback to trading futures with a smaller account.
The pattern day trade rule does not apply to futures trading. This is because there is significant risk in hold leveraged products like futures overnight. Day traders with smaller accounts can take advantage of this as they do not need to have account equity over $25,000 to actively take speculative intraday positions.
While this is a good thing for traders with less capital it still does not put them in the best position to succeed in the long run. Futures are leveraged products and can present a trader with much more risk than an equity or equity options position. This means that traders who cannot meet the minimum equity required by the pattern day trade rule might not have enough capital to trade futures effectively. For example if oil futures are currently trading with a daily average true range of $1.80 a trader can expect the value of a 1 lot in futures to change by $1,800 a day. If a trader has less than $25,000 in their account this might be too much risk for them to take on.
Binary options and Nadex spreads provide under-capitalized day traders with a solution to this problem. Binary options and Nadex spreads both trade with limited and well defined reward to risk setups. They also are free from restrictions like the pattern day trader rule (PDT). Nadex spreads allow a trader to speculate on indices and commodities without having to meet the PDT requirements or worry about being under-capitalized. Traders can access a variety of markets with these products and can open an account with as little as $100.00.
If you have ever wanted to become a day trader but don’t have the capital needed to trade stocks or futures you should be considering binary options. The low contract value and easily scaleable products are the perfect environment to learn how to day trade and test your strategies.