Many people have heard the term pattern day trader but aren’t sure what it is. Simply put, this is an official FINRA designation and indicates someone who executes four or more trades within a five-day period. If you’re curious about the ins and outs of this type of market activity, read on.
Just the Basics
While executing trades in five consecutive days is certainly the main aspect, but there are other qualifications as well, including:
- It applies to margin accounts but not cash accounts
- The number of transactions must be 6% or more of the customer’s total actions during that five-day period
- They have to follow certain rules and guidelines
- There is a minimum equity requirement, usually USD $25,000
If you are successful only occasionally you may not entirely be considered a pattern day trader, but once you meet all of the necessary criteria you can make for a long run full of plenty of gains.
Certain Restrictions and Requirements Apply
In addition to the minimum equity requirement of USD $25,000, pattern traders can have their accounts restricted if the call is not met. In fact, the buying power for that particular account will be restricted for 90 days or until the margin call is met if this happens. In addition, these people are allowed to deposit funds to meet the margin calls within five business days, must have the minimum equity funds in the account for two full business days, and cannot use cross-guarantees to meet margin calls or minimum equity funds. All of these restrictions and requirements are developed by the NYSE and the Financial Industry Regulatory Authority. The organizations treat these people differently than those who hold positions overnight.
Many Consider This a Burden
Many experts consider being a pattern trader a real disadvantage, mostly for the following reasons:
- The $25,000 minimum balance requirement
- Sometimes comes with increased loss risks
There are many reasons why the Securities and Exchange Commission (SEC) decided to establish official rules for the pattern trader to follow, but most of these rules were devised to protect someone who is inexperienced from getting into too much trouble with their stocks. Because the minimum requirement is only $25,000, the SEC considers these people to be less experienced and therefore, they made laws and restrictions to help them from losing too much money.
Is This Type of Day Trading Legal?
This type of activity is definitely legal, which is why there are rules in place to govern how it takes place. If you avoid using leverage, trade no more than three times per week, and set strict goals for yourself, you can become a successful pattern trader over time. The work can be a challenge, but you can become more improved by further researching the rules and regulations to ensure sure you not only do not break any of the rules, but to avoid getting yourself in financial trouble as well. There are online resources and software to help you in this very popular activity.