Day trading on Robinhood has become increasingly popular among investors in recent years. Robinhood revolutionized the trading industry by introducing a user-friendly interface and commission-free trading options. These two features have made Robinhood an attractive platform for investors looking to make quick trades.
However, day trading is not for everyone, and it’s precisely why Robinhood actively discourages day trading on its platform. While day trading on Robinhood isn’t forbidden, investors must weigh the pros and cons before diving in.
In this comprehensive guide, we’ll discuss what day trading on Robinhood is, the pros and cons of Robinhood day trading, and how to determine if it’s the right strategy for you.
What is Day Trading on Robinhood?
Day trading is a strategy in which investors buy and sell stocks on the same day to take advantage of small price movements. Robinhood allows investors to execute day trades without paying commission fees, an attractive option for those looking to make same-day trading returns.
However, Robinhood’s trading platform is designed for mobile devices and is less robust than other platforms like E-Trade or TD Ameritrade. While the platform offers several trading and analytical tools, day trading is risky and not recommended for beginners. Moreover, Robinhood implements a feature to protect traders making big losses. This feature is called “Pattern Day Trading.”
What Should You Know About Pattern Day Trading on Robinhood?
Pattern Day Trading is a FINRA (Financial Industry Regulatory Authority) rule that applies to margin accounts. The rule states the following:
Buying or selling the same stock or ETF on the same trading day or opening and closing the same options contract on the same day is considered a day trade.
Robinhood considers you a Pattern Day Trader if you make four or more day trades within five days. In addition, the number of day trades must exceed more than 6% of your total trades in the same five-day period.
You can continue making more day trades if your Robinhood margins account contains more than $25,000 each trading day. The amount considers all stocks, options, and cash but excludes cryptocurrencies.
Pattern Day Trading is a FINRA rule; all brokerages must abide by and enforce it, including Robinhood.
Before you try day trading on Robinhood, here are the pros and cons of this strategy and help you determine if it’s right for you.
Day Trading on Robinhood Pros and Cons
|User-Friendly and Easy-to-Use Day Trading Interface||Poor Customer Support|
|Trade Stocks, ETFs, Options, Cryptocurrencies||Limited Day Trading Tools|
|Zero-Commissions for Day Trading||No Educational Resources for Beginners|
|Desktop and Mobile App||No Mutual Funds|
|Low Margin Rates|
Examining the pros and cons of day trading on Robinhood will enable rookie and experienced investors to determine if day trading is something they should try. However, we will reiterate once more; day trading is risky, and the likelihood of making bad trades is always possible. In addition, the lack of educational resources for beginners, poor customer support, and lack of day trading tools should be a concern for investors looking to try day trading on Robinhood.
With that said, we must also mention that Robinhood is one of the few brokerage platforms that actively discourages day trading on its platform due to the high-risk factor.
How to Know if Day Trading on Robinhood is Right for You?
Day trading on Robinhood can be a risky strategy unsuitable for everyone, especially inexperienced traders and rookie investors. So here are a few questions to ask yourself to determine if day trading on Robinhood is right for you:
- Do you have any prior investing or trading experience? Day trading can be complicated, so it’s important to have a solid foundation in investing before attempting to make day trades.
- Are you comfortable with handling risk? Day trading is difficult and involves a high level of risk, and it’s possible to lose money quickly.
- Do you have the time to day trade? Day trading requires constant market monitoring and making quick, timely trades, which can be time-consuming.
- Do you have a solid trading plan? It’s crucial to have a trading plan before making trades to avoid making impulsive decisions based on emotion.
Answering these questions before day trading on Robinhood is crucial for understanding what you’re getting into. Day trading promises high returns and big gains, but the outcome is often the opposite for inexperienced traders. Therefore, we will give you several tips to help you understand how to day trade.
Tips To Help Investors Start With Day Trading on Robinhood
These tips will help investors better understand the nature of day trading and its risk. Therefore, these tips aim to educate beginner traders and hopefully assist in making better trades.
Note: Neat Dollar is purely educational, and traders must take their own responsibility for making poor day trades.
- Set Realistic Goals
Before starting to day trade on Robinhood, set realistic goals for your profits and losses. Setting goals will help you stay disciplined and avoid making impulsive decisions based on emotion.
- Use Limit Orders
Limit orders allow you to set a specific price to buy or sell a stock, which can help you avoid buying or selling at an unfavorable price.
- Keep an Eye on the Market
Stay informed about market trends and news that may affect your trading stocks. This can help you make informed trading decisions.
- Only Invest What You Can Lose
Day trading is a high-risk strategy, so investing money you can afford to lose is crucial.
- Use Stop-Loss Orders
Stop-loss orders allow you to automatically sell a stock if it falls below a specific price, which can help you limit your losses.
- Diversify Your Portfolio
Always diversify your portfolio. Diversifying your portfolio can help you minimize risk and increase your chances of making profits.
- Learn From Your Mistakes
Everyone makes trading mistakes. Use your mistakes as learning opportunities to improve your trading strategy.
- Keep a Trading Journal
Keeping a journal of your trades can help you track your trading progress and identify areas for improvement in your strategy.
- Stay Disciplined
Stick to the trading plan and avoid making impulsive decisions based on emotion or fear.
- Practice With a Demo Account
If you’re new to day trading, consider practicing with a demo account to get a feel for the platform and refine your strategy before risking real money.
Day trading on Robinhood can be a lucrative strategy for experienced investors who are comfortable with risk and have the time to dedicate to making quick trades. However, it can be risky for beginner investors who lack experience with any kind of trading.
Therefore, weighing the pros and cons of Robinhood day trading and determining if day trading is the right strategy for your financial goals and risk tolerance is important. With careful planning and research, day trading on Robinhood can be profitable.
Frequently Asked Questions
Yes, day trading is allowed on Robinhood. However, traders must abide by the Pattern Day Trader rule, which limits how many day trades you can make in a period.
Robinhood flags any trader as a pattern day trader if they make four day trades within five days if they don’t have a portfolio worth $25,000. So no, you cannot day trade on Robinhood without $25,000 in your margins account.
You can make four day trades within five days on Robinhood. You can day trade three times in a single day.