Day trading rules are essential for anyone and everyone who is looking to engage in day trading. You see, a different and special set of rules govern day trading. Regulators set up these rules to provide market stability and to discourage/protect against reckless trading. So if you want to be a day trader make sure you know the rules before you find yourself in trouble!
The first thing you need to figure out is if you are, in fact, a day trader or someone who will be engaging in such activity. A day trader is defined as anyone who buys and then sells, or short-sells and then buys a stock within the same day. In order to qualify, a trader has to conduct such trading in 4 out of 5 business days. Moreover, the investment must account for 6% or more of the person’s total trading activity. If you meet these criteria you are considered a pattern day trader.
The biggest single rule is that a pattern day trader must maintain at least $25,000 dollars worth of equity on any day in which he or she is day trading. If the trader’s account falls below this threshold, he or she cannot day trade again until the requirements are met.
Regulations also restrict day traders in how much they can trade in a given day. If they exceed the limitations, they will face a margin call and will have to deposit money to bring their account up to meet regulations.
So make sure you keep these rules in mind if you decide to day trade! If you break the rules you could find your account frozen, or you might even face an investigation by regulatory authorities! Day trading can be very lucrative, but it is also high risk. That is why it is so heavily regulated.
Understanding How To Day Trade
So now you know the primary rules of day trading. Still interested in such trading? It can be a great way to make money. However you should know that there are a few key limitations to day trading. Some of these limitations and challenges will vary from online broker to online broker, so make sure you check with your broker.
First off, every time you conduct a trade you will be charged a fee. If you’re the type of investor who buys a stock and then holds on to it for a long time, fees won’t make too big of a difference for you. If you’re trading several times a day for several days in a row, however, fees can add up very quickly. Make sure you keep that in mind if you are looking to day trade.
Once you know all the fees involved, you should check with your broker to see if they have any individual rules or requirements for day trading. Most won’t have rules beyond those required by the government. It’s best though to make sure you cover all your bases first.
The next thing you need to understand is the risks involved. Investors make money off of price volatility, which basically means rising and falling prices. If you’re going to make money off of stocks within a single trading day that means you’ll have to be trading stocks that are recording dramatic price swings.
In general, the only types of stocks that record such swings are higher risk stocks. It might be a penny stock, or it could be a company struggling through a turn-around. Either way if you’re going to engage in day trading you’re likely going to have to engage in higher risk trading. So make sure you keep that in mind!