5 min read

Day Trading on Robinhood: Pros and Cons

Robinhood is a popular discount brokerage that is based in the United States. The company was established in 2013 and is based out of Menlo Park, California, in the heart of Silicon Valley. Robinhood was one of the first American brokerages to introduce zero-commission fees, although it was later revealed that it is able to do this due to a process called payment for order flow (PFOF).

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What is day trading on Robinhood?

Robinhood is a trading app and while it doesn’t explicitly encourage day trading as it targets novice investors, it doesn’t prevent it either. Day trading on Robinhood is like on any other brokerage, you can buy shares of a stock and then sell those shares at a loss or a gain during the same intraday trading session.

Robinhood even allows options trading if you receive approval from the platform. Options, day trading, and margin trading are all popular on Robinhood, and can often make for a dangerous combination for new day traders. Let’s take a closer look at day trading on Robinhood.

How to do day trading on Robinhood?

Day trading on Robinhood works in the same way as it does on other brokerages. Using the different order types that Robinhood offers, day traders can execute all of the typical types of day trades within the same trading session.

Here are some examples!

Robinhood Order types

According to Robinhood’s customer support page on order types, these are the following order types that are allowed when day trading:

  • Market Orders
  • Limit Orders
  • Stop Orders
  • Stop Limit Orders
  • Trailing Stop Orders

And these are the order types that are not offered on Robinhood’s platform:

  • Short Selling
  • Bracket Orders
  • Market-on-Close Orders
  • Market-on-Open Orders

Day traders on Robinhood are free to enter Good-For-Day (GFD) and Good-til-Cancelled (GTC) orders as well.

Pros and cons of day trading robinhood

 

Pros Cons
  • Easy to use
  • Zero Commissions on trading
  • Desktop and Mobile apps
  • Low Margin Rates
  • Payment for Order Flow
  • Restricts trading
  • Better brokerages on the market
  • Bad customer support


Why doesn't Robinhood allow day trading?

We can see why you would think this, but day trading is technically allowed on Robinhood. What you are probably thinking of is the very specific regulation called pattern day trading. If you are following the rules and regulations of FINRA and the SEC, then you should have no problem day trading on Robinhood.

What is the pattern day trading restriction on Robinhood?

What if you are accused of pattern day trading on Robinhood? You will be if you execute four or more day traders within a five-day period. These day trades must account for more than 6% of your total trades with a margin brokerage account during that five-day period.

This might sound complicated, but here is what you need to know: as long as your brokerage account balance stays above $25,000 at the end of the trading day where you are marked as a pattern day trader, then you are okay!

Remember, that is the closing balance of your brokerage account for that session. On Robinhood, this does not include cryptocurrencies, but it does include options contracts. If you find yourself in violation of the pattern day trader regulations, then you will receive a 90-day trading ban for your Robinhood account.

We discuss all this in detail and how to trade without $25k.

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How to turn off pattern day trading on Robinhood?

Robinhood offers Pattern Day Trade Protection, which essentially sends you a warning to your device once you have made three day trades in the specified period. You can easily turn this feature on through your mobile app to help control your day trading by doing this:

  1. Tap the account icon in the bottom right corner of your app
  2. Tap Account Summary
  3. Scroll down and tap Day Trade Settings
  4. Toggle Pattern Day Trade Protection On or Off

It’s as simple as that! Now, anytime you are day trading on Robinhood and reaching your threshold of trades, the app will automatically send you a warning. You can also turn this feature off at any time if you don’t think it will affect you.

However, in order to place more than four day trades in a 5-day period, you'll need to keep your account balance above $25k. Sorry, it's just the rules.

Why does Robinhood restrict trading?

One of Robinhood’s more infamous headlines was how it restricted trading during the meme stock short squeeze in January of 2021. If you recall, this is when stocks like GameStop and AMC were squeezing higher in a coordinated attack on shorts by retail traders. The plan was orchestrated on Reddit and forever created a divide between retail traders and Wall Street.

Robinhood headlines on restricting day trading
Robinhood doesn’t actually restrict trading on a regular basis. We can all agree that while the platform should not have restricted trading for these meme stocks, this was an extraordinary situation. Rumors are that if Robinhood had not restricted trading of those stocks, it would have been liquidated.

This topic has been a contentious one even as we are a year removed from the short squeeze events. The ability to restrict the trading of certain stocks did not sit well with retail traders and many of them left the platform in protest. The way it was done during these events was certainly not ideal. Robinhood restricted the buying of the meme stocks but did not restrict selling. By default, the only pressure that these stocks could see was selling pressure, which meant that the stock price would fall.

Although this remains a reason why a lot of retail traders refuse to use Robinhood to this day, it has been pointed out that it is explicitly written in the Terms of Service and User Agreement. Unfortunately for Robinhood users, the User Agreement clearly states that it “may at any time, in its sole discretion and without prior notice to [users], prohibit or restrict [users] ability to trade securities”.

What are Robinhood's fees?

Incredibly, Robinhood is a commission-free trading experience. Of course, this is one of the more appealing features of the platform and a reason why a lot of retail traders with low accounts started using it.

The following trades are completely free on Robinhood’s platform:

  • All equity trades including stocks and ETFs.
  • All stock options trades are free.
  • All crypto trades are free.

While all transactions are free on Robinhood, it does not mean there aren’t fees to pay. There are several tiers of Robinhood membership which can result in some premium subscription fees. For example, if you want to trade on margin you will need to be approved for a Robinhood Gold Membership which costs an extra fee of $5.00 per month.

There are also some additional fees like an account transfer to or from another brokerage which will cost you $75.00. If you want to withdraw funds, you can send a domestic overnight check. This will cost you an additional fee of $20.00 though!

You should also be aware of the commission-free debate around selling order flow. If you plan to be very active day trader, you may want to look into direct access brokers. The argument is that, yes, you might have commission-free trades with Robinhood, but they shave pennies or more off the top of every order. In other words, you end up paying for your orders, nonetheless. It is only the illusion of "free trading.

What should I use instead of Robinhood

If in the end you have decided that Robinhood is not for you, then there are plenty of other options on the brokerage market. Established brokerages like TD Ameritrade and E*Trade have lower fees, although not completely free like Robinhood. The benefit of using established platforms is that they offer a full range of order types and trading options, while also providing excellent customer support and robust desktop and mobile applications.

If you want to try other discount brokerages you can check out newer platforms like SoFi Active Investing, WeBull, and even CashApp. There is a long list of brokerage options in America, so if you are not happy with Robinhood, you can easily always switch over to another platform.

What if you use Robinhood for crypto trading? There are also plenty of centralized crypto exchanges that you can use instead. Check out industry leaders like Binance US, Coinbase, FTX, or Crypto.com for a crypto experience that is just as good and if not better than on Robinhood.

Conclusion: Day Trading on Robinhood

As one of the leading brokerage platforms for retail traders, Robinhood has been a popular destination for both new and experienced day traders. But is day trading even legal on Robinhood? Absolutely! As long as you abide by the FINRA regulations for pattern day trading, then you can trade to your heart’s content with Robinhood’s zero-commission trading policy.

Robinhood allows users to day trade stocks, ETFs, stock options contracts, and even cryptocurrencies with no trading fees. If you are still feeling unsure of Robinhood because of its recent history of restricting trading, then there are plenty of other stock and crypto brokerages for you to trade with.

Day trading on Robinhood isn’t for everyone, but it is perfectly legal and accessible for any of its users.

That being said, if you are new to day trading and you want to learn in a safe training environment, we recommend you check us out here at TradingSim. Day trading can be extremely risky. Make sure you test out your day trading strategies before you put your money at risk!

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