As a day trader, you aren’t restricted to trading with just the cash you have on hand in your brokerage account. The total amount of money you can deploy is known as your buying power. It includes both cash and margin provided by your broker.
It’s crucial to understand buying power so that you know what position sizes you can open and avoid triggering margin calls. In this guide, we’ll explain everything you need to know about day trading buying power.
What is Buying Power?
Buying power is a measure of how much money you can utilize within your brokerage account to trade at any given time. If you have $10,000 in buying power, for example, you can open positions worth up to $10,000 in total.
Importance of Buying Power
Buying power matters because it defines how much capital you have available to trade. You can never open positions that exceed your buying power.
It’s essential to keep your buying power in mind when trading. In many cases, you may want to determine position sizes as a percentage of your buying power rather than a fixed dollar amount.
For instance, if you size your positions to be 25% of your available buying power at the start of the day, you can open up to 4 positions simultaneously. If you size your positions to be 10% of your available buying power, you can open up to 10 positions at the same time.
Buying power decreases when you open positions, but it increases when you close positions. So, you can recycle capital throughout the trading day to open new trades.
How Buying Power Is Determined
Buying power is equal to your excess maintenance margin divided by your broker’s margin requirement.
Excess maintenance margin, in turn, depends on your cash balance, your broker’s initial margin requirement, and your broker’s maintenance margin requirement. In the US, stock brokers must require a minimum initial margin of 50% (2x leverage) and a minimum maintenance margin of 25% (4x leverage). Many brokers have stricter margin requirements.
The best way to understand this concept is with an example.
Say you deposit $25,000 in cash in your account. Your broker has an initial margin requirement of 50%, meaning you can buy up to $50,000 worth of stock, and a margin maintenance requirement of 25%.
Before you open any positions, your excess maintenance margin is $25,000:
$25,000 (cash balance) + $0 (stock balance) – $0 (margin maintenance requirement) = $25,000 excess maintenance margin
So, your starting buying power is $50,000 ($25,000 excess margin/0.5 margin requirement).
If you buy $40,000 worth of stock, you’ll use all of your available cash plus take out a $15,000 loan. So, your excess maintenance margin would be $15,000:
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–$15,000 (cash balance) + $40,000 (stock balance) – $10,000 (margin maintenance requirement) = $15,000 excess maintenance margin.
In this case, your remaining day trading buying power is $30,000 ($15,000 excess margin/0.5 margin requirement).
Notably, buying power for day traders is reset each morning by your broker. You can’t increase your buying power during the day with an instant deposit or by selling positions you had held overnight. Your buying power will go down when you open intraday positions and go back up when you close intraday positions, but it will never exceed your starting buying power for that day.
How to Check Your Buying Power
Most brokerage platforms display your buying power prominently within your account dashboard. You can see both your starting day trading buying power for the day and your current buying power, which factors in any open intraday positions.
If your broker doesn’t display your buying power, you can calculate it using your cash balance, position balance, and margin requirements.
How to Increase Your Buying Power
Your starting buying power is reset daily, so there’s no way to increase it within the span of a single trading session. However, you can increase your buying power from day to day.
First, you can add cash to your account. More available cash increases your excess maintenance margin.
Second, you can look for brokers that offer lower margin requirements. For stock positions, US brokers are required by FINRA’s Regulation T to mandate 50% initial margin and 25% maintenance margin. Many brokers have higher margin requirements, however, so switching brokers may allow you to increase your buying power.
If you don’t already use a margin account, switching from a cash account to a margin account is another way to boost your buying power. With cash accounts, your buying power is equal only to your available cash.
Additional Considerations
There’s more to managing your trades than simply trading up to your maximum allowed buying power.
First, it’s crucial that you manage your capital effectively throughout the trading day. You may want to hold some buying power in reserve for an opportunity. You may also want to close positions quickly, allowing you to recycle your capital for trading during the afternoon.
It’s also very important to avoid margin calls that can force you to close positions prematurely. You’ll receive a margin call if your excess maintenance margin drops below zero. The relationship between buying power and excess maintenance margin means that as you consume more of your buying power, you’re more likely to risk a margin call.
Conclusion: Day Trading Buying Power
Day trading buying power is the maximum amount of capital you can deploy to trade during a day. It is equal to your excess maintenance margin divided by your broker’s margin requirement.
The simplest way to increase your buying power is to add cash to your account. However, keep in mind that new deposits won’t increase your maximum buying power until the following trading day.
