It’s a great way of helping traders be more responsible.
So, when it comes to intraday trading rules, what exactly do you need to be aware of before you start? Below, we’ll give a breakdown of the day trade rule and what it means for your trading activities.
What does day trading involve?
Before we get into what the day trade rule is, let’s first define what day trading is. This is when an individual buys and sells stocks within the same trading day. The goal is to make a profit from short-term price fluctuations in the market.
The valuable items bought and sold include stocks, currencies, commodities, and exchange-traded funds (ETFs). Traders use a number of tools to help them decide which items to buy and when to sell for the best possible profit.
While it can be very profitable, it can also be risky. You need to have experience, financial acumen, and discipline to be successful. That’s why the day trade rule has been put in place — to help day traders conduct their business with more responsibility.
How exactly does this work? We discuss this below.
What are the rules of day trading?
The day trade rule is a regulatory requirement that applies to certain types of trades made by investors in a margin account. It protects investors from making many risky transactions in a day. This is done by limiting the number of trades that can be made to a certain percentage of the account’s total trading activity.
Therefore, day trading rules are regulatory measures applied to pattern day traders. These are people who complete more than four “day trades” within five business days. However, the number of day trades needs to represent more than 6% of total trades in the margin account during these same five working days.
The pattern day trader rule (or PDT rule) applies to all trades made that day, regardless of type. So, these include day trades made in stocks, currencies, or commodities. Additionally, trades made in different brokerage firms also count.
Knowledge is Power — How to Adjust Your Day Trading Strategies
So, when you know that your daily transactions are limited, you should adjust your PDT trading strategies accordingly. To study which stocks, commodities, currencies, and other financial instruments would be most profitable, one needs to put in a lot more time and effort.
After all, you don’t want to miss out on a potentially lucrative trade because you’ve reached your limits based on the PDT rule. But there’s more you need to know about the day trade rule. It’s around how much money should be in your margin account.
Does your day trading account have over or under $25,000?
The specific requirements of the day trade rule vary depending on the type of account and the size of the account. For those under $25,000, the rule applies if it makes more than three-day trades within five business days.
However, an account over $25,000 has slightly different circumstances for the rule. This account would be subject to the rule if it makes more than four-day trades within five business days.
Think About Doing Margin Trading as an Alternative
To circumvent the intraday trading rules limitations, consider margin trading. Also known as “buying on margin”, it’s when a trader borrows money from the broker to buy stocks. You’re, therefore, able to buy more securities that can help you make more profits.
Obviously, you’ll need to pay back the borrowed money, sometimes with interest.
But you’d have (hopefully) managed to make a profit from your trading. This is a common practice within brokerage firms and is worth a try. It’ll expand your options, especially if your account has less than $25,000 in it.