What Is the Pattern Day Trader Rule? Here’s What You Need to Know

Written by on July 20, 2019 in Stuff with 0 Comments

Day Trade 

Day trading has been at its peak recently and many of you must be curious to know more about it. In this article, we will discuss what day trading entails and how this type of trading can be advantageous for both beginner and regular traders.

A day trader is an investor who is trying to make a profit by making quick trades within one trading day. The day trader does not leave open positions overnight but closes all transactions before the market closes. Some day traders use leverage to increase returns from small stock price fluctuations.

Pattern Day Trader

Pattern day trader is a FINRA designation for a stock market trader who enacts four or more day trades in five business days in a broker account (also known as margin account), provided the amount of the trades in a day are more than six percent of the customer's total trading activity in that same five-day duration.

Pattern Day Trader Rule

So what is the Pattern Day Trader rule? PDT Rule is the designation adopted by the US Securities and Exchange Commission (SEC) for traders who commit 4 or more days on a margin account for five consecutive business days, provided that the number of day trades is more 6% of the total number of client transactions during the same 5 business days.

In order to engage in day trading in the US market, a trader needs to have at least $ 25,000 on a brokerage account. Funds must be placed on the account before the start of intraday transactions.

Funds in the amount of $ 25,000 can be placed both in the form of cash (bank transfer) and in the form of securities. If the trader’s own capital falls below $ 25,000 on any of the trading days, he will receive a notice to ban intraday transactions. The ban on day trading operations will be maintained until the day trader replenishes his brokerage account with cash or securities up to the required amount of $ 25,000.

As mentioned above, a day trader has to trade the same security for four or more times in a day. Therefore, this is undoubtedly a difficult task, since it has to have very sharp reflexes and the ability to make instant and intelligent decisions. There are some rules and requirements for a day trader pattern that you have to meet before you are allowed to play in the market. It is necessary that he has a balance of $ 25,000 in his account for this type of trade. To achieve this active facility, a stockbroker has to approach its broker and understand the terms and conditions of the stock exchange regarding those transactions.

Open and close transactions

As stated above, day trading consists of buying and selling securities on the same day. This is indeed a very difficult task considering the fact that the market has become extremely volatile. What day traders have to do first is to predict a range for the index on that particular day. They also have to keep a close tab to all stock market-related news and change their strategies based on market conditions on a daily basis.

A day trader has to bet on certain select sectors of the economy for the day. For example, some trader may be bullish on banks on a given day, for some reason (good financial results, attractive valuations, etc.). There is always a reason behind every movement of a day trader.

While some traders pass by, others prefer to go short on a weak market day. The short sale of intraday implies the sale first and then cover positions before the end of the trading session. Stop losses are important in both directions of trading to protect against heavy losses in the event of sudden and unexpected market movements.

Profits at the appropriate levels are imperative for intraday traders. After all, you have entered the market to earn good money and this is possible only when you leave your positions at the right time. Therefore, when you think the costs stand out, get out of the action immediately.

The life of a day merchant patron is full of action and has to be very attentive and sharp to earn good money. This is a work of experts and therefore it is recommended that you learn in the long term by investing first before trying it. Good luck and do it well!

What Happens If You Break The PTD Rule?

If a day trader doesn’t meet or breaks any of the rules and regulations set by the US Securities and Exchange Commission they can face mild to severe penalties. On a first offense or violation of the PTD rule, one can likely get away with a warning but on the second offense according to NYSE regulations a traders account will have to be freezed for a period of 90 days. This is a steep cost to pay and that is why knowing PTD rules inside out are so important.

How Much Money Can One Make Day Trading?

The honest answer to this question is that most day traders end up losing money more times than not. However, successful day traders can also make a whole lot of money in really quick time depending on a mixture of knowledge and luck. Technical analysis and the ability to decipher information quickly and make quick trading decisions is what differentiates a successful day trader from the countless who don’t make it. In order to be successful in day trading, one has to live and breathe stocks and know the ins and outs of the stock market.

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