Day Trading

Day Trading, because of its perceived risk, has been regulated in a way that other forms of trading haven't been. If you intend to day trade, you need to understand both the risks and the regulations. The articles from the SEC on the right outline some of the former, while the latter are outlined below. If you meet the definition of a "pattern day trader", these will apply to you.

:: Definition

A "pattern day trader" is anyone who executes four or more day trades within five business days, provided the number of day trades is more than 6% of the total trades in the customer's trading account during that period. Accordingly, if you make 4 or more day trades over a five day period and these trades comprise more than 6% of all of your trades during this period, you will be subject to the day trading margin rules.

:: Minimum Equity

Someone defined as a "pattern day trader" needs to maintain a minimum of $25,000 in their account on any day in which they are trading.

:: Buying Power

A "pattern day trader" can buy securities with a value of up to four times the amount of excess equity in their account, which is usually calculated at the close of business on the previous day.

:: Margin Calls

A "pattern day trader" has five days in which to meet a margin call should they exceed their buying power, during which time they are restricted to a margin equal to two times their account excess. If the call is not met with the five days they are restricted to cash purchases for 90 days or until the call is met.

:: Overnight Positions

The closing of either long or short overnight positions are not treated as day trades.

If you really want an in-depth understanding of day trading, then have a look at Day Trading Rules and Facts. In its seven pages, it goes through a lot of information that is useful not just for day traders but traders in general.

:: From The Sec

The SEC provides an interesting perspective on Day Trading (and investing in general) that is probably worth considering.

The first one, Day Trading: Your Dollars at Risk, while pointing out the obvious risks, does make the point that successful day trading often requires the use of a significant amount of margin, and stresses the importance of understanding exactly how margin works (and the double edged knife it can be).

The second one, Tips for Online Investing: What You Need to Know About Investing In Fast-Moving Markets, covers a number of useful areas, such as: the difference between trading and investing, market orders vs. limit orders, what to do if you're unable to access your online account, freeriding, the "myth" of the required margin call and what SEC regulations don't cover.