What Is Buying Power in Trading? Definition and How It Works

You fund your account with one number, then open your platform and see a different number staring back at you, which is much bigger than what you’ve deposited.

It's this gap that confuses nearly all new traders and it is exactly what will be discussed in this article.

So, what is buying power in trading? 

Buying power is simply the total sum you can use for opening new positions right now. It's your actual money, plus the money that your account allows you to trade with using margin or leverage. 

By the end of this article, you will learn 

• how buying power is calculated, 
• how it changes by account type, 
• and how to use it without blowing up your account.

What is buying power in trading? (the simple definition)

Buying power helps to answer one practical question: How much can I trade at the moment?

Buying power includes the money you have and extra capital coming from your broker or firm. It is not a constant value and changes with every opening of positions and returns when positions close or cash is deposited.

Let's start with an easy example. Let's say, you have $5,000 of cash in a regular cash account. Then, your buying power is equal to $5,000. No margin, no leverage – simply because there are no borrowed funds. This is where all the calculations mentioned in this article are based on.

Buying power vs. account balance vs. purchasing power

These concepts are always getting confused. Let us make it clear for you.

An account balance means the total sum of money in your trading account. In case you use leverage, your buying power might exceed your balance, or it might become smaller due to open positions or unsettled cash. There is an interconnection between buying power and your balance, but they are not identical.

Purchasing power, however, is a totally separate idea. It is a macroeconomic term about how much a currency can actually buy as inflation climbs or eases. It has nothing to do with how much you can trade. So don’t confuse the two.

While buying power is the ability to trade with available finances, purchasing power is a concept related to macroeconomics and describes the amount of purchases that people can make in accordance with changes in inflation. They should not be mixed up.

The purchasing power, on the other hand, is something completely different. This term is used in macroeconomics to define how much a currency can buy amid growing or dropping inflation rates. That's why you shouldn't mix it with trading terms.

How buying power works: cash accounts vs. margin accounts

There's a big difference here. Once you understand the main principles, everything else becomes easier.

If the account is cash-based, the buying power is equal to the settled cash, which means the funds that have already cleared. No other money can be used for trading until the cash is cleared after the sales process, known as T+ settlement.

In a cash account, buying power is equal to settled cash position. You trade solely with cleared funds. After you sell, the proceeds are usually required to pass a brief settlement period known as the T+ settlement. Until that cash settles, it isn’t part of your buying power.

A margin account works differently. The broker gives you additional buying power based on your equity, often doubling it.

Margin means borrowing from the broker and using your account as collateral. It's important to note here: the money borrowed should be repaid, and overnight balances usually incur interest charges.  Margin allows for more room to trade, but it is a loan, not free capital. 

The standard ratios: 2:1 and 4:1 (and the PDT rule)

Margin accounts run on multipliers, and two versions show up a lot.  

A standard margin account provides roughly 2:1 overnight buying power. So if you’ve got $25,000 in equity, it could hold roughly $50,000 in positions overnight.

For active intraday traders in the US, day trading buying power (4:1) is available to those classed as pattern day traders. The same $25,000 can maintain approximately $100,000 in intraday positions with the ratio of 4:1. 

However, there is an important detail here. The PDT rule and minimum requirements for day trading ($25,000) are US-specific and are dictated by FINRA and the SEC. They don’t apply everywhere. Some areas and brokers have different leverage and margin limits. If trading outside the US, be sure to see the rules and terms of your broker. 

Another rule to be stated quite simply: the more you can afford, the more risk you take. The same multiplicative effect that works on profits is in force for losses. 

How is buying power calculated? (with examples)

In practice, how does one calculate the buying power? The formula is not as complicated as what most traders think. Here they are, with a worked example for each. 

Cash account: buying power = settled cash. Example: $25,000 in settled cash gives you $25,000 in buying power.

Standard margin (2:1): buying power = equity x 2. Example: $25,000 equity x 2 = $50,000 in overnight buying power.

Day trading (4:1, US PDT): buying power = maintenance margin excess x 4. Example: $25,000 in margin excess x 4 = $100,000 in intraday buying power.

See for yourself by doing the calculations using your own balance.

Buying power by account type:

The exact number will vary depending on your broker, the instrument you trade, and the rules where you live. Treat the table as a guide and NOT a promise.  

Buying power in futures and forex (briefly)

Unlike stocks, futures and forex have a much more aggressive scaling of buying power. 

Futures are based on contract leverage, meaning a small amount of margin is used to control a larger amount of the contract. 

Forex trading involves high leverage ratios, which could be as high as 1:30 or 1:100 or even higher, depending on the region and the regulations in place. The specific boundaries are variable from jurisdiction to jurisdiction. 

The takeaway is simple. Beyond stocks, the same deposit can bring about a whole lot more purchasing power, making disciplined risk control even more significant.

Buying power in a prop / funded account (the part most guides skip)

This is the part that almost every other guide would skip and it's important to mention when you are trading a funded account or prop.

When you trade with a prop firm, the firm assigns you an account size, for example, $50,000 or $100,000, along with the buying power that comes with it. You do not post that capital yourself. Rather, you normally pay a small assessment fee, and trade inside the firm's rules and leverage.

This is where a common confusion shows up on trader forums. For a funded or prop account, the buying power is based on the firm's money and leverage, not on money you put in. Your downside is not based on a "margin call" on your capital but according to the firm's drawdown limits. 

Contrast this with retail margin. Retail margin involves borrowing from your own capital, repaying what you borrowed with interest on the overnight balances. A funded account, on the other hand, gives the firm more money to split the profits with. It's different, but the result is the same; you exchange more than you could with your own money.

More precisely, respectable companies organize them as simulated skill environments to evaluate and develop trading skills. No income guarantees are given with an evaluation. The focus is making capital available, not making money. 

Buying power vs. leverage: what's the difference?

Traders use these two words as if they mean the same thing. They do not.

In the buying power vs leverage comparison, the distinction is clean. Leverage is the ratio that increases your exposure, e.g., 2:1, 4:1, 1:30. Buying power is the amount of dollars that are available for trading.

In other words: leverage equals multipliers, and buying power equals product. 

What happens if you exceed your buying power

When you go over your "budget," two things happen.

Any trades placed that are larger than the balance will typically be rejected. But if you are already over the line, for example, a margin position has moved against you, you may receive a margin call. This is a call from your broker to put money in or to close the positions to get your account back on the right track. If you do not meet it, the broker can force-liquidate your positions, often at unfavorable prices.

There is a parallel in funded accounts. When you go over your risk limits in a prop account, it is typically a violation of a drawdown rule, which could lead to losing the account rather than a margin call. Different way, but same lesson: respect your limits before they respect you.

How to use buying power wisely

Don't use buying power as free money. Just because you can trade at 4x does not mean you should.

A few practical principles help here:

• Size positions off your risk per trade, not your maximum buying power. Position sizing should start from how much you are willing to lose, not how much the platform lets you deploy.
• Keep a buffer. Trading at the very edge of your buying power leaves no room for normal market movement.
• Think twice about holding leveraged trades overnight, as risks and interest accumulate during those hours.
• Consider the expense of margin interest before you decide to borrow money.

The above guidelines are purely educational. Leveraged or margin trading involves high risks; therefore, losses can exceed deposits in certain markets. Consult your broker regarding your account regulations.

How to increase your buying power (legitimately)

When you need to give yourself more room to trade, here are some legitimate methods of doing just that:

• Deposit more capital into your account.
• Close or reduce open positions to increase available margin.
• Wait for unsettled cash to clear in a cash account.
• Qualify for a margin or portfolio-margin account from your broker.
• Gain access to accounts from prop-trading firms.

All of these methods have pros and cons. The more buying power you have, the more risk management is involved.

Putting it together

Buying power is the amount of cash in your account plus any leverage or margin that you can afford. It depends on your account type and market; it is a risk management tool which should be respected and not a score to push.

Balance is a measure of what you have, while buying power is a measure of what you can use. You should understand that difference and keep your balances in order.

A great way to have access to real buying power without risking a large portion of your own funds is through a funded account with a prop firm. Audacity Capital provides evaluated traders with funded accounts, scaling potential and free education via Trader University.

Account sizes and conditions vary by program, but traders who achieve their profit targets without breaching any rules can earn up to 90% of their profits through the Firm's Profit Sharing Program. Please remember that trading carries risks and hypothetical performance does not predict actual results. 

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