5 Day Trading Rules

5 Day Trading Rules

If you are thinking about day trading and want to learn how to get started, keep reading. Here are 5 day trading rules for success.

1. Pattern Day Trader (PDT) Rule

A day trader who executes four or more trades, representing more than six percent of the customer’s total trades, within a five business day period, is a pattern day trader. If you are deemed a pattern day trader, you are required to have 25 thousand dollars or more in your trading account. If your trading account is below 25 thousand dollars, you are not allowed to trade until that threshold is reached.

In addition to these rules for pattern day traders, you can’t exceed your buying limit. If you exceed the buying limit, you will be issued a margin call. If a margin call is issued, then your buying power is reduced, and you must meet the margin call within five business days, or your buying power will be reduced even further.

2. Superficial Loss Rule

Also known as the 30-day trading rule, the superficial loss rule comes into action when capital losses are disallowed, meaning you cannot claim capital loss. A superficial loss occurs during the period 30 days before the sale transaction for the capital loss, and 30 days afterwards. The main point of this rule is to prevent people from making artificial transactions for the sole purpose of causing a capital loss.

3. 3 Day Clearing Rule

The 3 day clearing rule is a rule for day traders with cash accounts. If you have a cash account as a day trader and you sell a security, you must wait three business days to access your funds to trade. Traders under the 3 day clearing rule are also not permitted to pattern day trade nor are they able to buy securities using borrowed money. If a day trader under the 3 clearing rule attempts to pattern day trade, their account will be frozen for up to 90 days.

4. Leverage

This rule only applies if you want to day trade under 25 thousand dollars. If you use leverage, you are opening up a margin account which is the act of using borrowed money to increase returns. Leveraging can be beneficial if you are trying to grow a small account with a proven day trading strategy.

5. Time Your Trading

Day trading is stressful for the experienced trader, which means it can be excessively stressful for the rookie day trader. This is why it is important to time your trades to avoid being labeled a pattern day trader, if you have under 25 thousand dollars. Instead of making four trades a day, make three.

The Bottom Line

Day trading can be a complex task but if you follow the rules for day trading, even a beginner day trader can be successful. It is easy to get the hang of if you set your mind to it, and soon you’ll be trading like a professional.

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