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“After being consulted and coached by John, I realized that, before we met, I was only had hope, stress and fear, not the calm, control, and competence I need to win.” Billy Jack
Become a Pattern Day Trader?
Given the vast majority of investors and traders (investors, swing traders, and day traders) are losers, I wonder why this guy has a smile on his face?
Pattern Day Trader Rule
The key day trader rule for day trading stocks is that day traders must maintain a minimum account of balance of $25,000. (More details below)
Learning to be a champion, day trading stocks, is another matter.
Learning required patience, practice with your coach, and trading a bit beyond your comfort zone.
We call the day trading system for learning to win:
The day Trading WEALTH learning program – for Winning Day Traders.
All said and done, day trading stock is easy: day traders just buy and sell stocks, right?
Masterful trading, wealth building trading, however, is an altogether different matter – here we need confidence (absent all distractions), competence (power packed competitiveness), and performance results (consistently profitable winning).
For mastery we need screen time, practice – becoming a winning pattern day trader is a learning process.
Pattern Day Trader – Learning Process:
Stage One for day traders – no risk, minimal stress trading – NEW SCHOOL.
Each client day trader starts their learning process with me paper trading (stocks day trading with simulator day trading software) – first trading only 100 shares to learn the software, then 500 shares, then 1,000 shares , all the while doing what’s needed to gain day trading confidence, competence, toward winning results.
The challenges here: trading software and trade execution – again, New School.
New school – new meaning:
- Perspective – a shift from an overwhelming focus on the Money, as well, a Mental focus (calculations based on seemingly endless chart indicators, and “Picks” for the day) – to calm, in control Winning.
- Day Trading Systems– for winning:
- Consulting System – strategy, day trader direction – for winning,
- Day Trader Coaching System – shift from blindness to mastery,
- Day Trading Room System – real time, big money winning.
- Day Trading Strategies – as every day trader is unique, special – day trading strategies need to be tuned and then re-tuned, for each daytrader – to achieve the ultimate goal – the prize – wealth building winning.
For beginners, going cash, I recommend a trading account balance of $50,000; trading on the edge of $25,000 is not even close to the comfort zone you need for learning.
The day trader learning process with cash day trading is much like paper trading, but now every day trader client needs my help dealing with old-school thinking and habits – to bridge the gaps revealed between existing performance and aspired performance.
Bridging Day Trader Performance Gaps – Example:
Bridging the performance gaps of a “blow out” account loser – to end, once and for all, big money losing.
Address break-even trading performance gaps – to become a consistently profitable, and I might add, delighted performance.
And those with so-so income investors, swing traders, and day traders, producing a trading income much like an average worker’s income (or think of your current income on the job or owning a business) – to have CEO-like income, get to the performance level of a Wealth builder.
As a pattern day trader, you progress from 100 shares, then 500 shares, then 1,000 shares a day trade, at 1,000 shares of more, you will need a trading account of $100K to $200K to have buying power with high price stocks – or you will be trading a few hundred shares.
Pattern Day Trader – what about Google?
When you “do a Google” (or use the Google AdWords keyword tool), the terms with the most global and local monthly clicks – pattern day trader and day trading rules are: pattern day trading, day trading rules, daytrading rules, day trader rule, day trader rules, pattern day traders, pattern day trader, pattern day trade, day trade rules.
The “Dictionary” Sites – More Information:
Below I have excerpted definitions and other day trading rules information from three authority websites as they relate to pattern day traders – for your additional information.
Notice the terms being searched – day trading rules, daytrading rules, day trader rule, day trader rules, pattern day traders, pattern day trader, pattern day trade, day trade rules – are not the terms you find in the descriptions provided by these information sites.
This may be the disconnect between what we think we know and what we need to know, that when bridged with this information, allows us to play by the rules of the game of day trading stock.
Another informative video on stock chart patterns and pattern day trading – the video does not relate to trading individual stocks, no matter, just catch the information you relate with:
Pattern Day Trader FINRA Requirements And Restrictions – Just Google that for more info.
Commentary on subjects and issues by a community of authors -from expert and novice alike:
“Pattern day trader is a term defined by the U.S. Securities and Exchange Commission to describe a stock market trader who executes 4 (or more) day trades in 5 business days in a margin account, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.
As the trader is exposed to the danger of day trading and intraday risks and potential rewards, it is subject to specific requirements and restrictions.”
“A FINRA (NASD) rule that applies to any customer who buys and sells a particular security in the same trading day (day trades), and does this four or more times in any five consecutive business day period; the rule applies to margin, but not to cash accounts.
A pattern day trader is subject to special rules. The main rule is that in order to engage in pattern day trading you must maintain an equity balance of at least $25,000 in a margin account.
The required minimum equity must be in the account prior to any daytrading activities. Three months must pass without a day trade for a person so classified to lose the restrictions imposed on them.
Pursuant to NYSE 432, brokerage firms must maintain a daily record of required margin.”
“Rule 2520, the minimum equity requirement rule was passed on February 27, 2001 by the Securities and Exchange Commission (SEC) approving amendments to National Association of Securities Dealers, Inc. (NASD).”
“A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 4 or more round-trip day trades within any 5 successive business days.
If, however, the number of day-trades is less than or equal to 6% of the total number of trades that trader has made for that five business day period, the trader will not be considered a pattern day trader and they will not be required to meet the criteria for a pattern day trader.”
“A non-pattern day trader (i.e. someone with only occasional day trading), can become designated a pattern day trader anytime if they meet the above criteria.”
“If the brokerage knows, or reasonably believes a client who seeks to open or resume an account will engage in pattern day trading, then the customer must immediately be considered a pattern day trader without waiting 5 business days.”
Source: Information Memo of Amendments to Rule 431 (“Margin Requirements”) Regarding “Day Trading”.
Requirements and Restrictions
“Under the rules of NYSE and Financial Industry Regulatory Authority, a trader who is deemed to be exhibiting a pattern of day trading will be subject to the “Pattern Day Trader” laws and restrictions, which is treated differently from a normal trader. In order to day trade:
- Day trading minimum equity: the account must maintain at least US$25,000 worth of equity.
- Margin call to meet minimum equity: A day trading minimum equity request is called when the pattern daytrader account falls below
- US $25,000. This minimum must be restored by means of cash deposit or other marginable equities.
- Deadline to meet calls: Pattern day traders are allowed to deposit funds within 5 business days to meet the margin call
- Non-withdrawal deposit requirement: This minimum equity or deposits of funds must remain in the account and cannot be withdrawn for at least 2 business days.
- Cross guarantees are prohibited: Pattern day traders are prohibited from utilizing cross guarantees to meet day trading margin calls or to meet minimum equity requirements. Each day trading account is now required to meet all margin requirements independently, using only the funds available in the account.
- Restrictions on accounts with unmet calls: if the call is not met, the account’s day trading buying power will be frozen for 90 days or until day trading minimum equity margin call is met again.
Day Trading – Buying Power
“The rule increases day trading buying power to up to 4 times a pattern day trader’s maintenance margin excess. For example, if a trader has $100,000 worth of equities, the leverage ratio is 4:1 meaning that it can buy securities of up to $400,000.”
“For day trading in equity securities, the day trading margin requirement shall be 25% of either:
- the cost of all day trades made during the day; or
- the highest open position during the day.
If a client’s day trading margin requirement is to be calculated based on the latter method, the brokerage must maintain adequate time and tick records documenting the sequence in which each day trade is completed.”
SEC – Office of Investor Education and Advocacy
“FINRA rules define a “pattern day trader” as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period.
“This rule represents a minimum requirement, and some broker-dealers use a slightly broader definition in determining whether a customer qualifies as a “pattern day trader.” Customers should contact their brokerage firms to determine whether their trading activities will cause them to be designated as pattern day traders.”
“A broker-dealer may also designate a customer as a “pattern day trader” if it “knows or has a reasonable basis to believe” that a customer will engage in pattern day trading. For example, if a customer’s broker-dealer provided day trading training to such customer before opening the account, the broker-dealer could designate that customer as a “pattern day trader.”
“Under FINRA rules, customers who are deemed “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts. For more information on pattern day traders and related FINRA margin rules, please read the SEC staff’s investor bulletin
“Margin Rules for Day Trading.”
“Margin Rules for Day Trading The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors regarding the margin rules that apply to day trading in a Regulation T margin account and to respond to a number of frequently asked questions we have received.”
“Executing four or more day trades within five business days = “pattern day trader”.”
“If a broker-dealer designates a customer as a “pattern day trader” Financial Industry Regulatory Authority (FINRA) margin rules require that broker-dealer to impose special margin requirements on the customer’s day trading accounts.”
What is a “Pattern Day Trader”?
“FINRA rules define a pattern day trader as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period.
Customers should note that this rule is a minimum requirement, and that some broker-dealers use a slightly broader definition in determining whether a customer qualifies as a “pattern day trader.”
We recommend that customers contact their brokerage firms to determine whether a broader definition applies to their trading activities.”
“A broker-dealer may also designate a customer as a pattern day trader if it “knows or has a reasonable basis to believe” that a customer will engage in pattern day trading.
For example, if a customer’s broker-dealer provided day trading training to such customer before opening the account, the broker-dealer could designate that customer as a pattern day trader.”
What is a “day trade”?
“FINRA rules define a day trade as:
“The purchasing and selling or the selling and purchasing of the same security on the same day in a margin account. This definition encompasses any security, including options.
Also, the selling short and purchasing to cover of the same security on the same day is considered a day trade.”
Exceptions to this definition include:
- A long security position held overnight and sold the next day prior to any new purchase of the same security; or
- A short security position held overnight and purchased the next day prior to any new sale of the same security.
Day Trading Margin Requirements: Know the Rules
We are issuing this investor guidance to provide some basic information about day trading margin requirements and to respond to a number of frequently asked questions that we have received.
Summary of the Day-Trading Margin Requirements
“The rules adopt a new term “pattern day trader,” which includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period. Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades.
The required minimum equity must be in the account prior to any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.”
“The rules permit a pattern day trader to trade up to four times the maintenance margin excess in the account as of the close of business of the previous day.
If a pattern day trader exceeds the day-trading buying power limitation, the firm will issue a day-trading margin call to the pattern day trader.
The pattern day trader will then have, at most, five business days to deposit funds to meet this day-trading margin call. Until the margin call is met, the day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on the customer’s daily total trading commitment.
If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.”
“In addition, the rules require that any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls remain in the pattern day trader’s account for two business days following the close of business on any day when the deposit is required.
The rules also prohibit the use of cross-guarantees to meet any of the day-trading margin requirements.”
Frequently Asked Questions
“Why the change?”
“The primary purpose of the day-trading margin rules is to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities.
It was determined that the prior day-trading margin rules did not adequately address the risks inherent in certain patterns of day trading and had encouraged practices, such as the use of cross-guarantees, that did not require customers to demonstrate actual financial ability to engage in day trading.”
“Most margin requirements are calculated based on a customer’s securities positions at the end of the trading day.
A customer who only day trades does not have a security position at the end of the day upon which a margin calculation would otherwise result in a margin call.
Nevertheless, the same customer has generated financial risk throughout the day.
The day-trading margin rules address this risk by imposing a margin requirement for day trading that is calculated based on a day trader’s largest open position (in dollars) during the day, rather than on his or her open positions at the end of the day.”
What is a day trade?
“Day trading refers to buying then selling or selling short then buying the same security on the same day. Just purchasing a security, without selling it later that same day, would not be considered a day trade.”
Does the rule affect short sales?
“As with current margin rules, all short sales must be done in a margin account. If you sell short and then buy to cover on the same day, it is considered a day trade.”
Does the rule apply to day trading options?
“Yes. The day trading margin rule applies to day trading in any security, including options.”
What is a pattern day trader?
“You will be considered a pattern day trader if you trade four or more times in five business days and your day-trading activities are greater than six percent of your total trading activity for that same five-day period.”
“Your brokerage firm also may designate you as a pattern day trader if it knows or has a reasonable basis to believe that you are a pattern day trader.
For example, if the firm provided day trading training to you before opening your account, it could designate you as a pattern day trader.”
Would I still be considered a pattern day trader if I engage in four or more day trades in one week, then refrain from day trading the next week?
“In general, once your account has been coded as a pattern day trader, the firm will continue to regard you as a pattern day trader even if you do not day trade for a five-day period.
This is because the firm will have a “reasonable belief” that you are a pattern day trader based on your prior trading activities.
However, we understand that you may change your trading strategy.
You should contact your firm if you have decided to reduce or cease your day trading activities to discuss the appropriate coding of your account.”
Day Trading Minimum Equity Requirement
What is the minimum equity requirement for a pattern day trader?
“The minimum equity requirements on any day in which you trade is $25,000.
The required $25,000 must be deposited in the account prior to any day-trading activities and must be maintained at all times.”
Why is the minimum equity requirement for pattern day traders higher than the current minimum equity requirement of $2,000?
“The minimum equity requirement of $2,000 was established in 1974, before the technology existed to allow for electronic day trading by the retail investor.
As a result, the $2,000 minimum equity requirement was not created to apply to day-trading activities Rather, the $2,000 minimum equity requirement was developed for the buy-and-hold investor who retained securities collateral in his/her account, where the securities collateral was (and still is) subject to a 25 percent regulatory maintenance margin requirement for long equity securities.
This collateral could be sold out if the securities declined substantially in value and were subject to a margin call.
The typical day trader, however, is flat at the end of the day (i.e., he is neither long nor short securities).
Therefore, there is no collateral for the brokerage firm to sell out to meet margin requirements and collateral must be obtained by other means.
Accordingly, the higher minimum equity requirement for day trading provides the brokerage firm a cushion to meet any deficiencies in the account resulting from day trading.”
How was the $25,000 requirement determined?
“The credit arrangements for day trading margin accounts involve two parties — the brokerage firm processing the trades and the customer.
The brokerage firm is the lender and the customer is the borrower. In determining whether the existing $2,000 minimum equity requirement was sufficient for the additional risks incurred with day trading, we obtained input from a number of brokerage firms, since these are the entities extending the credit.
The majority of firms felt that in order to take on the increased intra-day risk associated with day trading, they wanted a $25,000 “cushion” in each account in which day trading occurred. In fact, firms are free to impose a higher equity requirement than the minimum specified in the rules, and many of them already had imposed a $25,000 requirement on day trading accounts before the day trading margin rules were revised.”
Does the $25,000 minimum equity requirement have to be 100 percent cash or could it be a combination of cash and securities?
“You can meet the $25,000 minimum equity requirement with a combination of cash and eligible securities.”
Can I cross-guarantee my accounts to meet the minimum equity requirement?
“No, you can’t use a cross-guarantee to meet any of the day-trading margin requirements. Each day-trading account is required to meet the minimum equity requirement independently, using only the financial resources available in the account.”
What happens if the equity in my account falls below the minimum equity requirement?
“If the account falls below the $25,000 requirement, you will not be permitted to day trade until you deposit cash or securities in the account to restore the account to the $25,000 minimum equity level.”
I’m always flat at the end of the day. Why do I have to fund my account at all? Why can’t I just trade stocks, have the brokerage firm mail me a check for my profits or, if I lose money, I’ll mail the firm a check for my losses?
“This would in effect be a 100 percent loan to you to purchase equity securities. It is saying you should be able to trade solely on the firm’s money without putting up any of your own funds. This type of activity is prohibited, as it would put your firm (and indeed the U.S. securities industry) at substantial risk.”
Why can’t I leave my $25,000 in my bank?
“The money must be in the brokerage account because that is where the trading and risk is occurring. These funds are required to support the risks associated with day-trading activities. It is important to note that the Securities Investor Protection Corporation (SIPC) may protect up to $500,000 for each customer’s securities account, with a limitation of $250,000 in claims for cash.”
Day Trading Buying Power
What is my day-trading buying power under the rules?
“You can trade up to four times your maintenance margin excess as of the close of business of the previous day.”
“It is important to note that your firm may impose a higher minimum equity requirement and/or may restrict your trading to less than four times the day trader’s maintenance margin excess.
You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements.”
Day Trading Margin Calls
What if I exceed my day-trading buying power?
“If you exceed your day-trading buying power limitations, your brokerage firm will issue a day-trading margin call to you.
You will have, at most, five business days to deposit funds to meet this day-trading margin call. Until the margin call is met, your day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment.
If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.”
Does this rule change apply to cash accounts?
“Day trading in a cash account is generally prohibited. Day trades can occur in a cash account only to the extent the trades do not violate the free-riding prohibition of Federal Reserve Board’s Regulation T.
In general, failing to pay for a security before you sell the security in a cash account violates the free-riding prohibition.
If you free-ride, your broker is required to place a 90-day freeze on the account.”
Does this rule apply only if I use leverage
“No, the rule applies to all day trades, whether you use leverage (margin) or not. For example, many options contacts require that you pay for the option in full.
As such, there is no leverage used to purchase the options. Nonetheless, if you engage in numerous options transactions during the day you are still subject to intra-day risk.
You may not be able to realize the profit on the transaction that you had hoped for and may indeed incur substantial loss due to a pattern of day-trading options.
Again, the day trading margin rule is designed to require that funds be in the account where the trading and risk is occurring.”
Can I withdraw funds that I use to meet the minimum equity requirement or day trading margin call immediately after they are deposited
“No, any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls must remain in your account for two business days following the close of business on any day when the deposit is required.”
John McLaughlin, Day Trading Coach
Day Trader (Day Trading Stocks) – Consultant / Coach
Call for your Free Consultation ($500 value)
“John’s mastery of day trading stocks, trade execution inventiveness and expertise and intuitive timing place him among the top traders in the world, I’m sure.” Michael Carlo