How to Day Trade on TD Ameritrade

Fri Jul 9, 2021, 08:02 pm | by Dan Schmidt | No comments

Brief Overview of Day Trading 

Day trading is an investment technique where traders open and close all positions within a single session and hold zero securities overnight. Day traders utilize technical analysis to plot their trades since precise entry and exit points are needed to make profits. While buy-and-hold investors look for home run stocks, day traders try to minimize strikeouts by hitting singles and doubles. 

By holding no positions overnight, day traders minimize risk by giving themselves complete control over their trades. A bad earnings report or late-breaking negative catalyst doesn’t hurt a day trader as much since they’re always ready to liquidate a position at a moment’s notice. Losses are unacceptable to day traders and bad trades are exited instantly. 

Day traders also need to be aware of Pattern Day Trader (PDT) rules. According to PDT rules, a day trader using margin needs $25,000 in capital in their account at all times if they want to perform more than 3 day trades in a 5-day period. Brokers like TD Ameritrade will automatically bar any attempts to make a 4th day trade in a 5-day period if you don’t meet the capital requirements, which could result in holding a position overnight when you really don’t want to. 

TD Ameritrade Account Options for Day Trading

Day traders have two different vehicles for their capital at TD Ameritrade: cash accounts and margin accounts. The broker offers plenty of retirement and custodial accounts too, but most day traders prefer cash or margin accounts. Sure, you can day trade in your IRA if you really want to, but you’ll need to wait until age 59.5 to cash in any profits without penalty.

  • Cash Account:  A cash account is the standard account offered by most online brokers. With a cash account at TD Ameritrade, you can deposit funds with no minimum and begin day trading instantly since PDT rules do not apply to cash accounts. However, you won’t be able to trade with unsettled cash. Securities trades take two days to clear, although that may change in the future. 
  • Margin Account:  Margin simply means borrowed money and TD Ameritrade clients can borrow up to 50% of their capital from the broker in a margin account. Margin accounts have restrictions that cash accounts do not – you’ll need to abide by PDT rules unless you have $25,000 in capital and you’ll need at least $2,000 for access to margin. However, margin accounts don’t need to worry about settlement delays. 

All stock and ETF trading is commission-free at TD Ameritrade, although options and futures contracts will still carry a fee. Margin rates also vary depending on the amount you wish to borrow – check here for updated margin rates.

How to Day Trade on TD Ameritrade

Starting your day trading operation on TD Ameritrade is a simple process. You’ll need to choose between a cash or margin account, fill out your application, and fund your account to the appropriate levels. Once you’ve opened an account, your next step is picking a trading platform.

Choose a Trading Platform 

TD Ameritrade has a couple different choices when it comes to platforms. You can use the standard online investing platform, which can be used on both web browsers and mobile devices. Or you can use the suped-up thinkorswim suite, a powerful trading apparatus capable of plotting complex trades with advanced technical tools. Both platforms have mobile apps available for iOS and Android operating systems.

  • Standard Platform – The web-based platform has great functionality on both browsers and smartphones. You can trade multiple types of securities, watch videos and get real-time news reports, and read up on topics like retirement planning or wealth management. Trade execution is sleek and streamlined, plus there are plenty of technical indicators for traders with more advanced repertoires. You can transition seamlessly from the web application to the mobile application too.
  • thinkorswim Platform – Now here’s a trading setup with a little more torque. The thinkorswim platform is an advanced trading application with sophisticated tools for experienced traders. With over 400 technical indicators, thinkorswim is a day trader’s dream. You can plot multi-leg options trades, analyze through different tools like Trade Architect, or scan for opportunities using the Stock Hacker or Option Hacker. Thinkorswim also provides a paper trading simulator where practice trades can be made using $100,000 in fake money.

Things to Consider

  • Margin – Should you trade on margin? If you don’t have the necessary capital to avoid PDT restrictions, day trading with a margin account might not be the best idea. On the other hand, if capital is no constraint, margin accounts allow traders to bypass T+2 limitations and trade with unsettled cash. Margin can significantly juice your profits since you make money on borrowed cash, but you also could lose more than your original investment if a trade turns against you. Understand the pros and cons of margin trading before borrowing any cash from the broker.
  • Trading Hours Available – Most volatility occurs outside normal trading hours and many day traders want access to pre- and post-market trading in order to benefit from outsized moves. TD Ameritrade offers early market trading beginning at 7 am EST and after market trading up until 8pm EST. Some brokers allow trading as early as 4 am EST, so consider the available trading hours when debating an account with TD Ameritrade.
  • Available Security Types – Like most brokers, you’ll need specific access to trade certain securities. Options permission must be granted based on your trading experience level and futures can only be traded overnight using the thinkorswim platform. Can you access all of your preferred asset classes through TD Ameritrade? What about short selling or writing options? You’ll want to confirm these answers with customer service before signing up.

Use the Paper Trading Simulator to Practice 

Thinkorswim might be an intimidating platform for newbies, but the paper trading option is very beneficial for traders of all skill levels. If you’re a day trader, you’ll eventually want to ‘graduate’ to thinkorswim since it’s a much more robust platform. The paper trading account has all the bells and whistles of the real thing, so you can test out different tools and features without worrying about making an uncorrectable mistake.

If you’re unsure how the Trade Architect works or want to test out some unique options trades, use the paper trading simulator first. Even if you’re a seasoned pro with bountiful experience on the platform, the paper trader can still be a great practice field for new techniques or contrarian trades. But don’t let paper trading go to your head – your lizard brain gets much more involved with the process when real money is on the line.

Final Thoughts 

TD Ameritrade is a top choice for day traders thanks to their commission-free structure, the wealth of available asset classes and securities, and the irreplaceable thinkorswim platform. Getting started is quick and easy, plus you can give the platform a test spin using the paper trading account on thinkorswim. 

If you want to day trade on TD Ameritrade, use the paper trading simulator first to get a feel for the platform and all its available tools. And also be sure to understand the risks of day trading, using margin, and trading complex instruments like options and futures. Most prospective day traders flame out quickly and never make another attempt, so be sure you’re ready to put in the time and brainpower required for success.