How to Calculate Day Trading Buying Power
Day trading is a specialized form of activity in the financial markets that hinges on much different variables for success than regular investing does. The successful day trader must trade hundreds or thousands of shares to substantially profit from a small change in price. As a result, tens of thousands of dollars are often put to work in trades that may last only a few seconds. Recognizing the demands for successful day trading, the Financial Industry Regulatory Authority (FINRA) regulates high leverage "buying power" to benefit anyone active this field.
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Instructions
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Add the total value of cash and equities in a day trading account. FINRA requires day traders to have a minimum of $25,000 in cash and equity assets in a single account. An account meeting this requirement that has been active in day trades is automatically flagged as a "pattern day trader" account and has access to day trading buying power.
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Multiply the sum of assets in the day trading account by four. This is the available day trading buying power for use on the following business day. For example, an account with a value of $30,000 at day's end can purchase up to $120,000 worth of shares in any equity vehicle such as stocks or options on the following business day.
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Refrain from buying more shares than the buying power allows, and close all day trades by the end of the same day in which they were opened. If these rules are not strictly followed, the buying power will change to only two times the total assets of the account. This restriction will remain until enough funds have been deposited to warrant new buying power appropriate for the day trading history of the account.
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Tips & Warnings
Day trading buying power is necessary for most day traders to reasonably profit from day trading. Without this leverage, a day trader may be unable to purchase enough shares to make the job effective. However, quadruple leverage is very risky. It is possible to lose more money than you have in the account. While the buying power is automatically available to all accounts that engage in day trading, it is advisable for new traders to exhibit great caution and not trade large positions until their strategies have been proven consistently successful.
