Day Trading Rules
Financial Industry Regulation Authority (FINRA) makes rules and stipulations for day trading. All these rules apply to every pattern day trader in the US, provided they hold a margin account.
What is day trading?
Day trading is the buying and then selling or selling short and then buying the same equity on that very day. A margin customer trading in five business day for four or more times and in those five days the total day trades of the customer(s) must be greater than six percent of their total trading activity. The least amount of $25,000 is required to make day trades for any day. Such traders who want profits are known as speculators.
The usual leverage that the brokers use is 2:1 but some brokers even allow it up to 4:1. The margin interest is usually charged on overnight balances and the dealer has to pay no amount as interest for the margin benefit and can yet have the risk of a margin call. Stocks, options, currencies, and ETFs are the common types of securities traded in day trading.
Following rules should be kept in mind while doing day trading:
- Any day trader should have a minimum amount of $25,000 as equity to become eligible in the category of day traders. This amount is to be deposited before beginning any day trading activities and must be maintained all through this process.
- Day trading sales are only done in a margin account and one must do all the selling and buy on the same day. Any sale or purchase that exists from the previous day will not be accounted for in the category of day trading. The ‘time and tick’ is a commonly accepted method of calculating day trading.
- One can trade up to a maximum of four times in one single day in the New York Stock Exchange (NYSE) excess. The trader is met with a margin call if this limit is exceeded.
- If there is an existing marginal call on the account, the buying power is restricted and one can trade only two times on the NYSE excess. Until this marginal call exists, the ‘time and tick’ calculation method cannot be used and, in its place, the aggregate method is used which makes use of the total of all-day trades.
- Five business days are given to meet the margin call and if it is not met during this time, the buying power becomes even more restricted to trading only one time on the NYSE excess for a time period of 90 days or until the trader meets the call. During this time, one can execute only cash trades.
- When the trader deposits any resources for reasons such as meeting the minimum equity requirements or margin calls, those funds must remain in the customer’s account without withdrawing any sum of money for a minimum of 2 business days.
Therefore, these rules must be followed by anyone who aspires to do good day trading and obtain fair profits.
Pattern Day Trader
A pattern day trader is the one who follows all the rules of Financial Industry Regulation Authority, Inc. (FINRA) and the person has the access to execute four or more day-trades in a total of five business days within a margin account only. The condition is that the number of these day trades must definitely be more than six percent of the total trading activity of the trader during the same period of those five business days.
Such traders usually deal in stock options and short sales and all the dealings must be made on that very day only. The total minimum amount of $25,000 can constitute both cash and eligible securities. If in any case, the amount becomes less than the minimum value, the trader is forbidden from making any further investments until the amount is restored back to its minimum value.
If a trader gets a margin call, the person has to answer it within five business days. The trading power gets reduces to just two times a business day and if the call is call is not answered, the buying power is additionally reduced to just on trade per day for 90 days or till the time the call is answered.
Well, the rules of Pattern Day Trader (PDT) are applicable only to stocks and options. Also, the minimum investment value for PDT excludes many stock aspirants from doing day trades. This counts as a minus point in this business.
A better way of trading with less amount of money is to trade with multiple brokers. Day trading in the options market is also a considerably well choice. Options are the offshoot of a fundamental commodity (can be a stock). In this type of trading, the trader need not pay the upfront cost of the stock.
What to do in case of less investment cost, i.e. below $25,000?
If one-day trades outside the United States and deals with an outsider broker also, there are chances that the stock aspirant(s) will find a place to trade which meets their economic demands. This should be done very carefully with a lot of research done beforehand and all the related professional persons should be consulted before coming to any conclusion.
Joining a day trading firm is beneficial because in that case the amount to be deposited is quite less than $25,000 and the corporation becomes the provider of the capital to the trader for making trades. Trading with firms also keeps the investor on a safer side and losses incurred do not affect much.
One can also do day trading using cash accounts in place of margin accounts. This will exclude the trader from the pattern day trader rule because of the absence of margin. This way has some drawbacks also because the trading becomes highly restricted and many trading doors close for the investor. If done wisely and with patience, it can turn out to be a good dealing option.
Doing swing trading and enter trades. These trades are carried out for a long period of time, usually for days or weeks which is entirely contrary to the day trading pattern. If one does not find this a good option, opening several day trading accounts can help because one small account may become a difficulty to earn profits from.
Doing day trading in a very careful manner can give profits but patience and continuous efforts will help any day trader earn great sums of money.