How to Day Trade on Robinhood - Expert tips, Broker's Rules, and Restrictions

Should you Сhoose Robinhood to Day Trade?

Retail investors have the choice of many trading platforms. Robinhood is one of the best-known and well-loved options.

Robinhood Advantages

Easy To Use

Robinhood is incredibly straightforward to use. Opening an account is quick and easy, allowing you to download the app and start trading in less than an hour. The app itself is very user-friendly. It's lean and intuitive, with monitoring stock prices and your portfolio very easy. Executing trades is simple, and the platform integrates with TurboTax, allowing you to do your taxes efficiently.

Zero Fees for Trades

Robinhood was the first broker to offer zero fees for trades. This feature was so attractive to new users that most other actors in the industry have followed suit. Robinhood doesn't charge fees to open an account, maintain an account, or transfer funds into your account.

Hosts Thousands of Stocks and Cryptocurrencies

Robinhood allows trading of over 5,000 stocks, including the majority of U.S. equities and ETFs (exchange-traded funds) that are listed on the U.S. exchanges. Additionally, they also offer options trading and allow access to over 650 global stocks through ADRs (American Depository Receipts)

Heavily Regulated

All brokerage firms that handle securities are regulated by the SEC (Securities and Exchange Commission). This regulatory body oversees the securities markets to ensure fair dealings and transparency.

Free Stock on Sign up and For Referral

When users sign up, Robinhood gives them free stock. They guarantee that 1% of these free stocks will be worth between $50 - $200. If you are in the lucky 1%, this can be a nice boost to your trading portfolio. Additionally, if you refer somebody and they open an account, Robinhood will also send you a free stock.

Robinhood Disadvantages

Geographic Restrictions

One disadvantage of Robinhood is that it is only available in the U.S. To open a Robinhood account, you need to be over 18, be a U.S. citizen, and have a valid social security number. Without meeting these criteria, you cannot open an account.

The firm did have plans to expand across several regions; however, the difficulties experienced during the COVID-19 pandemic caused them to shelve these plans in July 2020. Currently, there is no word on when Robinhood will lift these regional restrictions.

Lack of Transparency on Charges

Many brokers generate income by accepting payment from market makers for PFOF (payment for order flow.) This process involves a broker (in this case Robinhood) receiving compensation for routing trades for execution. PFOF has been criticized in some circles because it creates unfair conditions that favor large firms over retail traders and investors.

No Desktop App

Robinhood is only available as an app. While this suits many retail traders who access the platform on smartphones or tablets, many of Robinhood's rivals offer access via a desktop app or cloud-based service.

Robinhood Fees

One of the most significant selling points of Robinhood is that it's commission-free. The platform doesn't charge fees to open or maintain an account or to deposit funds into your account.

However, SROs (self-regulatory organizations) like FINRA (Financial Industry Regulatory Authority) do charge Robinhood a small fee for any sell orders. These fees apply to any brokerage account and not specifically to Robinhood. As a result, Robinhood passes these fees on to its users and forwards them to the relevant SROs.

Some of the fees associated with trading on Robinhood are:

Regulatory Transaction Fee

FINRA is required by law to pay this fee to the SEC. FINRA passes this fee on to its members, like Robinhood, who tend to pass this fee on to its users. These fees are designed to cover the costs for the government and the SEC of regulating and supervising securities markets and professionals.

SEC fees are $5.10 per each $1m of principal for sales only. For users with sales of less than $500, Robinhood does not enforce this fee.

Trading Activity Fee

FINRA charges brokerage firms for regulation and supervision. Robinhood passes these fees on to users, but not in the case of sales of 50 shares or less. These fees are $0.000119 per share for equity sales and $0.002 per contract of options sales.

Robinhood Day Trading Rules and Restrictions

Now that you understand your account options, let's look at some of the rules and restrictions you need to observe when day trading on the Robinhood platform. Any platforms that offer day trading are tightly regulated by various financial regulators.

How Much Money Do I Need to Day Trade?

Robinhood has specific rules they use to protect investors. One of the big ones is the pattern day trading (PDT) rule. If you day trade, you may be familiar with this rule already. The rule dictates that Robinhood users can't place four or more days trades within a five-day period — unless they have more than $25,000 in their account. If you go over the three day trade limit Robinhood will restrict your account from placing further day trades for 90 days.

This rule doesn't apply to overnight trades. It only refers to buying and selling stock or options contracts during a single day, no more than three times in five business days. This rule applies to traders using any brokerage firm and was introduced by the Financial Industry Regulatory Authority (FINRA) to protect investors.

However, for day traders using Robinhood, there are some exceptions.

If these three day trades equal less than the total trades with your margin account, the restrictions don't apply. However, that scenario is relatively unlikely to occur.

Another way around this issue is to downgrade to a Robinhood Cash account because users of Cash accounts don't have access to margins. By not using margin trading, this FINRA rule won't apply.

If you want to execute four or more trades and decide to up your account balance to more than $25,000, there are certain things to consider. First, your account balance isn't officially over $25,000 until the deposit has cleared. Secondly, the margin offered in Robinhood Instant accounts won't count toward the total.

For example, if you have $20,000 in your Robinhood account and top it up to over $25,000, you need to wait until the deposit clears before you're free to day trade. This typically takes around five days.

Do These Rules Apply to Options Trading?

Like stock trading, if you buy and sell the same options contract on the same day, it is counted as a day trade. You'll know it's the same options contract if the ticker symbol, expiration date, strike price, and type (call or put) are identical.

Do the Rules Affect Short Sales?

Yes, the PDT regulations affect short sales too. However, Robinhood doesn’t directly offer its users the option of short selling.

How to Day Trade on Robinhood. Top 5 Expert Tips

Start With a Minimum Deposit

There is no minimum deposit on Robinhood, which is good news for new traders. Getting comfortable as a day trader involves learning a few lessons along the way. Keep your initial deposit small so none of these lessons are too expensive.

Develop and Test a Strategy

Day trading successfully requires a disciplined strategy. The financial markets are full of ups and downs, so you need a solid game plan to follow. Without a good plan, you'll most likely make emotional decisions. And emotional decisions are rarely winning plays.

So go into each trade with a clear plan and a defined exit strategy. Likewise, never break your money management rules.

Follow The Rules of Risk Management

Risk management will affect your bottom line more than most strategies. There are several aspects of risk management that you should follow, like the 1% rule. As mentioned earlier, this involves committing no more than 1% of your capital on one trade.

Other risk management strategies that you should follow are planning trades by setting Stop-loss (S/L) and take-profit (T/P) points. Have a plan when you open the trade and know when to get out.

Finally, diversifying your holdings is another time-honored strategy. Having too much of your investment in one stock — or sector — can be disastrous if the market moves against you.

Define What Success Is For You

Another essential tip for new day traders is to define what a successful strategy is. So look at your capital and decide how much you want to make from it per day, week, month, or year.

Additionally, when evaluating a particular strategy, think about opportunity costs. At the end of a specific period, calculate your returns. If you could have achieved the profit you've made with a more passive investment, then you'll need to ask yourself what you are hoping to get from day trading.

Learn Not to Trade on Occasion

When many day traders start, they set themselves a target of making X amount per day. This approach is reasonable; however, learning when not to trade is a vital skill to develop.

Some days the opportunities to make profits aren't there. Instead of forcing the action (and taking losses), sometimes the smartest move is to step away from the computer and try again tomorrow. If nothing is standing out as an opportunity, there is no shame in not getting involved.