The Best Broker for Day Traders Isn’t Who You Think

Dear Penny Stock Millionaire,

A while back when I was in Michigan talking to some of my students, we got on the topic of what platforms they are using to trade, and some of the pitfalls that they have encountered along the way.

Day traders use software, or electronic trading platforms, to chart and trade. There are a lot of choices when it comes to trading software.

Not all are created the same. For example, some software allows you to trade only stocks or funds. Other software is geared toward forex or futures.

To help you choose your software consider the answers to these questions:

  • Does the platform support the type of trading you do? If you want to trade penny stocks, then your trading software has to include those kinds of stocks.
  • Does the trading software connect with your online broker?
  • Does the software have the features you need for research on the go?

Choose the Best Online Broker for Day Trading

What are the best online stock brokers? What are the worst brokers? What are the safest brokers? What are the most dangerous brokers?

These are all valid questions. I’ve tried dozens of brokers in my life — maybe even hundreds.

One thing to consider is different brokers are good for different strategies. Lately, I’ve been dip buying.

I use E*Trade and Interactive Brokers, but you could use Schwab, Fidelity, or TD Ameritrade for dip buying penny stocks.

You want a big, well-known, broker that has decent execution and does the job you need it to do. While you don’t want to overpay on commissions, don’t be afraid to pay them. I look at it like this: If you cheap-out on your broker it’s like cheaping-out on your education. Don’t do it. Instead, educate yourself. Invest in your education.

Be wary of offshore brokers. Offshore brokers are not FDIC (Federal Deposit Insurance Corporation) insured. E*Trade, for example, is FDIC insured.

This means if something goes terribly wrong with the financial markets you are insured up to $250,000. But if you’re trading with an offshore broker you aren’t insured.

Order Execution Time is Key

You need to understand this: There are brokers who charge little or no commissions but you get screwed by bad order execution.

So you might save $5 or $10 per trade but you lose $50 or $100 because they don’t execute the order fast enough. This is one of the reasons I stick with big, safe companies like E*Trade.

Remember, it’s all about the bottom line. Profit or loss. So don’t try to get away without paying commissions. In many ways, commissions are a good thing. When you consider the commissions, it keeps you from overtrading.

I see people throwing money out by making these tiny trades because they don’t have to pay a commission. They throw $50 on this or $20 on that … with no strategy.

E*Trade or Ameritrade

I get this question often: “Which should I use, E*Trade or TD Ameritrade?” I can’t make that decision for you because it depends on your requirements. I use E*Trade but that doesn’t mean it’s better, it only means it suits me better. As you learn to become a day trader you’ll have to make some decisions. Do your homework.

To reiterate: Look for a company with good order execution time and one that does everything you need it to do. If it takes having accounts with two companies, so be it.

Day Trading Account Requirements

There are some requirements you need to consider if you’re going to be a day trader. Thankfully, there are a couple of regulatory bodies with everyone’s best interest in mind.

There’s the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). FINRA is a not-for-profit self-regulatory body for the financial industry.

The SEC is a government body created to protect individual investors.

SEC Regulation and the Pattern Day Trader Rule

The pattern day trader (PDT) rule defines a day trader as someone who makes more than four trades within a five-day trading period.

The rule requires the trader to maintain an account balance of at least $25,000. Keep in mind some brokers have their own requirements that exceed this industry standard.

The SEC supports the PDT rule on your behalf and FINRA supports the rule on the behalf of the industry. There was a time I didn’t like this rule. But, since I’ve been teaching for the last decade, I’ve come to appreciate it.

It keeps inexperienced traders from getting into the addictive trading behavior. It’s there for your protection as you start your trading journey.

You can still trade with a smaller account, you just can’t trade as often. But that’s good because it makes you do more research and be more careful about each trade you make. It will help you develop better habits and self-discipline.

Let’s wrap up day trading in one more issue.

In your next email I’ll cover with you my 4 key tips for day trading. They’ll get you started on the right foot if you’re considering tapping into this type of trading.


Tim Sykes
Editor, Penny Stock Millionaires