So you are performing online trading and trade stocks and/or options and call yourself a day trader. Do you know the requirements of day trading? In our user’s group, many times this question comes up and what happens if I accidentally (or on purpose) violate one of these rules? There are several variations of actions that can occur that may trigger day trading and I will try to answer most of them. As each situation is different, I will list the most common.
What Is Day Trading?
In this article we are only discussing day trading as it pertains to stocks and options. Commodities and Forex do not have the same day trading rules. I do not know about other trading disciplines.
If you buy and sell a stock or option on the same day, that is day trading. For instance, if you buy 1000 shares of stock ABC (fictitious symbol) at 9:30 am and sell the 1000 shares of stock at 12:15 pm, you have just entered into a day trade.
What Is a Pattern Day Trader?
A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 4 or more same day trades within any 5 successive business days and your day trading activities are greater than 6 percent of your total trading activity for that same 5 day period (from FINRA web site).
What Are The Rules?
1. Account over $25k. — To trade and not encounter any problems the equity in your trading account must be maintained over $25,000.
2. Buying/Selling same day — For accounts under $25k, if you buy and sell the same stock in the same day, any proceeds from that stock’s sale cannot be used in another trade on that same day. (May depend on brokerage account. My brokerage allows it but warns you about it.))
3. 3 times in a week — You are allowed only 3 trades within 1 week (5 trading days). The 4th day trade may subject you to a 90 day suspension of all day trading activities.
What Are The Penalties?
1. You may get a 90-day suspension of all day trading activities.
2. Your account can be suspended for 90 days and no trading will be allowed in that account.
How to Avoid Problems?
1. Maintain a minimum of $25,000 equity in your trading account.
2. For accounts under $25,000 do NOT buy and sell a position in the same day, hold your position overnight.
3. If you buy and sell the same stock/option in the same day, do not enter into a new trade where the monies from the sale of the stock just sold will be used in the purchase of the new position.
4. If you have purchased a position from monies from a prior same day sell, it is best to hold that position overnight.
5. Do not perform a day trade activity more than 3 times a week.
I have attempted to outline the day trading rules as I have encountered them over my years of trading. You can get much more detailed information by searching the internet for day trading and pattern day trader. A good source is Wikipedia.
I have traded several years in accounts under $25k and have never had a 90-day suspension rule applied, but have had several warnings about a trade that may trigger the 90-suspension rule. When this happens I just do not perform the trade and will wait till the next day. Happy trading…