How to Day Trade in a Retirement Account

Many people use retirement accounts to put money aside for when they are no longer working. Rather than buying bonds, US treasuries, or stocks, individuals with the skill and inclination may choose to day trade within their account. A skillful day trader can use a retirement account to protect against short term capital gains taxes. By learning how to day trade in a retirement account a person can potentially increase the earning power of their tax-sheltered retirement savings.

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Understand the Rules and Regulations Surrounding Day Trading in a Retirement Account

First of all one can trade futures, forex, options, and stocks in a retirement account. This applies to traditional, Roth, SEP, SIMPLE, and Solo 401(k) plans. However, there are rules that impose limits on how you trade. A person who wants to increase the earning power of their 401(l) or Roth IRA will want to understand and abide by these restrictions. You cannot borrow against your existing holding in an IRA and you cannot trade on margin. This restricts how much you can day trade in stocks. This is because if you make four or more day trades over five business days and the number of day trades of stocks exceeds six percent of the total trade activity of the margin account, the broker will flag the account as a?pattern day trader. This means you will need to carry a $25,000 margin account which you cannot do with a vehicle such as a Roth IRA.

Research the Markets to Recognize Potential Opportunities

Because rules for trading within a retirement account limit how often you can day trade stocks you will wish to choose the best trades with the best likelihood for profit and not engage in activities like scalping in which you will rapidly exceed the number of trades you can make in a retirement account. Traders should not limit themselves to the stock market but should consider opportunities in the futures market as well. Across all markets the day trader working within a retirement account has to follow the same rules like not borrowing money in order to trade, so short selling is not going to work in your IRA.

Choose a Reliable Broker With Low Fees and Commissions

At DayTradeSafe we teach our students to exercise?discipline in day trading?in the entry, management, and execution of all trades. In this regard it is important to realize that a retirement account is not the place for risky trades. It is also not the place to pile up expenses in terms of fees and commissions. Part of the answer here is to exercise discipline and limit how much you trade within your IRA. The other obvious thing is to choose a reliable broker with low fees and commissions to start with.

Understand the Basics of Technical Analysis to Make Informed Decisions

This part really applies to all day trading whether you are trading within a 401(k), and IRA, or outside of a retirement account. Learn the basics of technical analysis and practice in simulation trading on your?preferred platform?such as NinjaTrader until you are routinely making profits before you risk a cent of your own money in live trades in futures, stocks, forex, or options. Trading in your IRA is not a guarantee for success. Learning how to use technical indicators and exercising discipline when applying what you know is the route to follow in the pursuit of day trading profits.

Use Stop Loss Orders to Protect Your Capital

Along with learning the restrictions that apply to day trading within a retirement account, day traders working within a retirement account need to follow all of their normal procedures for placing, managing and exiting trades. The most important is to continue to use stop loss orders to protect your capital within your retirement account like you would in a normal trading account. In this regard it is important to remember that you can only fund your retirement account as the law allows while you can fund a normal account to the extent that you have the capital to do so.

Utilize Risk Management Strategies to Mitigate Losses

There is more to risk management that just setting stop loss and take profit targets while day trading in a retirement account. Day traders are wise to stick with the 1% rule in which the amount risked in any single trade is never more than 1% of the value of the trading account. Diversifying how you earn money in your retirement account is useful as is hedging risk by placing trades that offer protection against the risk contained in other trades. Perhaps the best way to manage day trading risk in a retirement account is to realize that this is money that you should only trade when you see a clear path to success.

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