1. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  2. Decision-Making Methods: Informed, Uninformed, Intuitive
  3. Informed Traders: Fundamental Traders, Technical Traders
  4. Swing Traders
  5. Buy and Hold Traders
  6. Value Traders
  7. Trend Traders
  8. KISS Traders
  9. Momentum Traders
  10. Range-bound Traders - Break-out Traders - Channel Traders
  11. Options Traders
  12. Options Seller Traders
  13. Day Traders
  14. Pattern Day Traders
  15. Intra-Day Traders
  16. Intra-Day Scalp Traders
  17. Introduction to Stock Trader Types
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion

If a day trader makes four or more day trades in a rolling five business day period, the account will be labeled immediately as a Pattern Day Trade account. Certain limitations will then be applied based on the account equity. (Account equity is the amount of cash that would exist if every position in the account were closed. This is also known as the liquidation value.)

pattern day trader is one who trades the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period. According to the rule, traders are required to keep a minimum of $25,000 in their accounts and will be denied access to the markets should the balance fall below that level. There are also restrictions on the dollar amount that they can trade each day. If they go over the limit, they will get a margin call that must be met within three to five days. Further, any deposits that they make to cover a margin call have to stay in the account for at least two days.

The pattern day trader rules were adopted in 2001 to address day trading and margin accounts. The U.S. Securities and Exchange Commission (SEC) rules took effect February 27, 2001 and were based on changes proposed by the New York Stock Exchange (NYSE), the National Association of Securities Dealers (NASD), and the Financial Industry Regulation Authority (FINRA). The changes increased the margin requirements for day traders and defined a new term, “pattern day trader.” The rules were an amendment to existing NYSE Rule 431, which had failed to establish margin requirements for day traders.

Benefits for pattern day traders

If the pattern day trader can maintain the minimum balance requirement of $25,000, there are certain benefits for this type of account. Increased access to margin - and therefore increased leverage - can be one of them.

For non-pattern day trade accounts with standard access to margin, traders may hold positions in value up to twice the amount of cash in their account. For example if the account has $30,000 in cash, the trader can buy up to $60,000 worth of stock. The trader uses the $30,000 and the brokerage firm lends the trader the remaining $30,000 on margin and charges interest on the loan.

Pattern day trade accounts will have access to approximately twice the standard margin amount when trading stocks. This is known as Day Trading Buying Power and the amount is determined at the beginning of each trading day. When trading stock, Day Trading Buying Power is four times the cash value instead of the normal margin amount cited above. So in the previous example, the trader would be able to trade up to $120,000 worth of stock.

Leverage and margin are trading tools and are meant to be used wisely. Financially speaking, leverage is when a small amount of capital is able to control a much more expensive asset or group of assets.

When trading and investing, leverage has the ability to magnify the skill set of the trader. If the trader is adept and able to profit while trading, leverage (margin) may help the trader to make profits faster and/or in larger quantities.

Caution for pattern day traders

If traders are not proficient, losses will rack up more quickly and in larger amounts when using margin.

When a trader day trades with borrowed funds (margin/day trading buying power) it is possible to lose more than the initial investment. A decline in the value of stock purchased may cause the brokerage firm to require additional capital to maintain the position. Absence of an immediate additional capital infusion may cause the broker to liquidate client positions at its discretion.

Intra-Day Traders

Related Articles
  1. Trading

    Introduction to Options Types

    Options are often the bread and butter of day traders. Here are some of the more common types of options.
  2. Trading

    An Introduction To Day Trading

    This article will take an objective look at day trading, who does it and how it is done.
  3. Trading

    How Much Trading Capital Do Forex Traders Need?

    Even a small pip profit can mean substantial percentage returns over time.
  4. Trading

    Average Rate Of Return For Day Traders

    A look into the question of day trader earnings and factors that play a role in trading success.
  5. Trading

    Pros & Cons Of Day Trading Vs Swing Trading

    Day trading involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems. Swing trading is based on identifying swings in stocks, commodities, ...
  6. Personal Finance

    A Day in the Life of a Day Trader

    Day trading has many advantages and, while we often hear about these perks, it's important to realize that day trading is hard work.
  7. Trading

    Top Reasons Forex Traders Fail

    This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding.
  8. Trading

    Adding Leverage To Your Forex Trading

    The use of margin to trade in the foreign exchange market can magnify profit opportunities.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center