Nearly a decade ago, Robinhood upended the investment world with its commission-free trading app. It was such a revolutionary idea, most other discount brokerage firms eventually followed suit. But beyond even without the commissions, there are still lots of regulations when it comes to day trading on Robinhood. 
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This budget-friendly brokerage firm has quickly amassed a base of more than 22 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 Robinhood at least weekly.
But there’s a big difference between checking in on your investment and actively trading with that kind of regularity.
Day trading used to be 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 mean accruing 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 about 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
- Instant
- Gold
- 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 every 30 days. With that fee comes increased buying power (higher levels of instant margin are available). It also grants access to level II Data and advanced market research. But Robinhood users must have at least $2,000 in their account to trade using margin.
And lastly, there’s Robinhood Cash. Like an Instant account, Cash allows users to 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
Robinhood employs certain rules to protect investors. And one of them is the pattern day trading (PDT) rule. This rule dictates that a Robinhood user cannot place three day trades within a five-day period. That is, unless they have 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. 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 Robinhood Cash. These users aren’t investing using margin. So they are free to do as they wish.
If your account is close to $25,000 and you’re 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 offered by Robinhood in Instant accounts does not count toward the total.
Let’s say you’ve got $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 business days. But you will get a notice from Robinhood as soon as your deposit has cleared.
So You’ve Been Labeled a PDT
Robinhood doesn’t take kindly to folks trying to get around its rules. Anyone with a Robinhood Instant or Gold account with less than the required $25,000 that engages in PDT will face a substantial penalty.
Any investor who places four day trades within a window of five consecutive business days will have their account flagged as a pattern day trader. This designation lasts for 90 days. The result is 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, they will face greater penalties. 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 the 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.
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dogs Dorito and Pretzel.
