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  • pattern day trader?(1) Replies

    tstacks03
    Bronze Member
    Join Date:02-19-2014
    Saint Marys, Georgia
    United States
    Posts: 3
    Replies: 1
    pattern day trader?2/19/2014 11:29:09 AM
    I'm unclear on exactly what a pattern d day trader is. Do you have to be margin trading or shorting? Or is it simply four trades in as many days
    • Pattern Day Trader designation explained(1) Replies

      Trade Ninja
      Bronze Member
      Join Date:01-10-2014
      El Paso, Texas
      United States
      Posts: 10
      Replies: 15
      Pattern Day Trader designation explained2/20/2014 12:00:28 AM
      That is a good question...definitely something you need to know and understand when you are starting to trade.

      Let me explain a few thing as you mentioned several different topics in the same post.

      1.) A day trade as defined by the Securities and Exchange Commission (SEC) is opening AND closing a trade during the same trading day.  What does this mean?  It means if you purchase a stock at the opening bell and hold it all day and sell in the last moments before the closing bell, that is considered a day trade.  If you open the trade 5 minutes before the closing bell and decide 4 minutes later to sell, that is considered a day trade.  The point is, if you OPEN and CLOSE a trade in the same trading session (day) then this is considered a day trade.  It doesn't matter how many minutes or hours you hold the open position.  As long as it is opened and closed in the same day, it's a day trade. 

      2.)  Margin is basically a LOAN from your broker that allows you to purchase more than you have the cash for.  When you open a brokerage account, you have the option to set up a "cash" account or a "margin" account.  If you create a cash account, you are not allowed to borrow any money to purchase more shares--no leverage.  With a cash account, you can only purchase shares up to the amount of "cash" you have in your account.

      With a "margin" account, you can purchase up to 2 times as many shares as you could with your own cash.  As an example, if you have a margin account and you have $2000 of your own cash in your account, your broker will lend you up to and additional $2000 to trade with, giving you buying power of $4000.  (Note:  you can't use margin on penny stocks and some other stocks have restrictions as well).  There is a small amount of interest you pay for using margin, just like any bank loan.

      Margin is both good and bad.  If you are experienced, it allows you to make twice as much on a stock since you can purchase twice as many shares with the same cash value.  The downside is that if the stock moves against you, you will lose twice as much as you would have if you only used the cash you had in your account.

      For beginning traders, I definitely do not recommend using margin in your trading.  This can be a very quick way out of the market.  Beginners should stick to the CASH value in their account when trading.  There is plenty of time to use margin after your trading improves.

      3.) Selling Short (commonly referred to as "Shorting") is when you believe a stock is going to DROP in value.  There are strategies called selling short that allow you to earn money when a stock drops.  This technique can be very profitable as stocks usually fall quicker than they rise.  However, this is NOT an option for beginners.  You should wait to learn shorting until you are very experienced in trading stocks.  The other criteria for "Shorting" is that you must have over $25,000 in your account before your broker will allow you to short a stock.

      4.) Now, what is a "Pattern Day Trader"?  Getting this designation when you have less than $25,000 in your account is bad news.  Traders with less than $25,000 in there account, are only allowed 3 "day trades" in a seven day period.  This means that if you open and close a trade more than 3 times within a 7 day period, your broker will give you a warning...but if you do this again, your broker can designate you as a "pattern day trader" and close your account.  The SEC rules are very strict and the brokerage companies follow them very closely.  They do not play around.  So, if you have less than $25,000 in your account, you have to be very careful about opening and closing your trades in the same day.  Of course there are times when it is necessary, for example when a stock moves against you and you close your trade.  No problem, that is one.  You just have to be careful not to let that happen more than 3 times in a week.

      So, for example:  let's say on Monday, you had 1 day trade.  That day trade won't be removed from your day trade count until NEXT Monday.  Once next Monday rolls around, that day trade will be removed from your day trade count.

      This day trading rule does make it a bit more difficult to trade as you many times hold on to positions that you should otherwise dump because you don't want to use up one of your allotted day trades.

      Over $25,000 this rule no longer applies and your broker will give you day trading authority...this time, it is a good thing!  It means you can open and close as many "day trades" as you want in any given day.

      I hope this helps!  If you have any more questions or need further clarification, please let me know. 
      • pattern day trader(0) Replies

        tstacks03
        Bronze Member
        Join Date:02-19-2014
        Saint Marys, Georgia
        United States
        Posts: 3
        Replies: 1
        pattern day trader2/20/2014 10:32:13 AM
        Yes it did help. Completely answered my question (s).