Day Trading On Robinhood: The Cans and Can-nots – Investment U


Financial Literacy

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It wasn’t too long ago that Robinhood upended the investment world with its commission-free trading app. The move triggered a whole bunch of other brokerage firms to follow suit. But there are still lots of regulations when it comes to day trading on Robinhood.

This budget-friendly brokerage firm has quickly amassed a user base of more than 10 million users. And they are an active bunch. An estimated 50% of users who have made a trade use the app daily. And 90% of users open up Robinhood at least weekly.

But there’s a big difference between checking in on your money and actively trading with that kind of regularity.

Once upon a time, day trading was limited to folks with deep pockets and a whole lot of time on their hands. After all, getting in and out of several positions a day could accrue some serious commission fees. But with commission fees no longer a part of the equation, investors young and old are becoming more active traders.

Now, before you start experimenting with daily pivots or movement trading, there are some important things to know before you start day trading on Robinhood. We’ll start with the different types of accounts this bargain brokerage offers and how they can affect your preferred style of trading.

The Three Types of Robinhood Accounts

  • Robinhood Instant
  • Robinhood Gold
  • Robinhood Cash

The first, Robinhood Instant, is the default. Anyone who signs up for a Robinhood account starts here. This is a margin account, which means that investors will have instant access to deposits they make. This allows folks to start investing right away.

Next is Robinhood Gold. This type of account comes with a fee of $5 for every 30 days. With that fee comes increased buying power (higher levels of instant margin are available) and research from Morningstar. But Robinhood users are required to have at least $2,000 in their account to trade using margin.

And lastly, there’s Robinhood Cash. Like an Instant account, this allows users to still place commission-free trades during extended hours and when the markets are open. But it doesn’t grant access to instant deposits. Folks who prefer not to trade using margin can downgrade to this type of account at any time.

The Pattern Day Trading Rule

This is where things get a little complicated. Robinhood employs certain rules to protect investors. And one of them is the pattern day trading (PDT) rule. This means that a Robinhood user cannot place three day trades within a five-day period. That is unless there’s at least $25,000 in their account.

And to be crystal clear, this doesn’t apply to overnight trades. You just can’t buy and sell a stock or options contract in a single day more than three times over the course of five business days. This isn’t just a Robinhood rule either. This applies to traders using any brokerage firm. But with day traders on Robinhood, there are exceptions…

If those trades equal less than 6% of the total trades within your margin account, there’s no problem. But that’s pretty unlikely. The other way to get around the $25,000 rule is to downgrade to a Robinhood Cash account. Because these users aren’t investing using margin, they are free to do as they wish.

If your account is close to $25,000 and are ready to put it over the edge in order to day trade, keep this in mind… The account balance doesn’t count as being “officially” over $25,000 until the deposit has cleared. The margin that’s offered by Robinhood in Instant accounts does not count towards the total.

Let’s say you’re sitting pretty with $24,000 in your Robinhood account. So you decide to deposit $1,001 in there to push it over the edge. You won’t suddenly be off the hook to day trade as you please just because it says you have $25,001 to invest. You’ll have to wait until the money clears and you’re not topped off with the margin offered by Robinhood. And this can take up to five days.

So, You’ve Been Labeled A PDT

Robinhood doesn’t take kindly to folks trying to get around their rules. Anyone with a Robinhood Instant or Gold account with less than the required $25,000 that engages in PDT will face a substantial slap on the wrist.

Any investor that places four day trades within a window of five consecutive business days will have their account flagged as a pattern day trader. This demarcation lasts for 90 days. And this results in not being able to make any day trades for that period of time.

If, however, someone tries to buck the system and continues to day trade during that 90-day probation, their account will be restricted even further. Anyone day trading on Robinhood with less than $25,000 in their account that has been marked with the scarlet PDT letters will have their account restricted even further.

Robinhood reserves the right to lock the account of PDT users for up to 90 days. This results in said user not being able to buy or sell any stocks or options for the full 90-day probation period.

Day Trading on Robinhood: The Bottom Line

Day trading is more popular now than ever. Twitter, Reddit and Discord are filled with folks swapping tips, plugging their stocks of choice and talking a whole lot of trash on their way to financial freedom. But day trading comes with a lot of risks. So before you get started, it makes sense to test your strategies before opening up your Robinhood app.

But if you’re sure that you’re ready and want to get started, just remember that day trading on Robinhood is taken very seriously. And in the world of investing, missing out on 90 days can feel like an eternity.



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