Tips on Day Trading Stocks
"Day trading" stocks is the common term for selling shares of stock on the same day they were bought. A trader who makes than the occasional same-day stock transaction will fall under a different set of day trading rules from the Securities and Exchange Commission. Day trading also carries special risks.
Occasional vs. Pattern Day Trader
SEC rules differentiate between a trader or investor who makes an occasional day trade and one who does day trading regularly. If a brokerage account has four or more day trades in any five-day period, the account will be designated a "pattern" day trading account. Pattern day trading accounts have higher equity requirements, and those traders are allowed a higher level of leverage when day trading. An investor or trader who does not want to be classified under the stricter day trading rules should limit the number of day trades.
Day Trader Margin Rules
A designated pattern day trading margin account must maintain trader equity of at least $25,000. Regular margin account rules require just $2,000 of equity. The pattern day trader is allow up to four times leverage when day trading, compared to two times leverage in a regular margin account. The equity used to support day trading cannot be withdrawn until two business days after the equity has not been used to support day trading. For example, $50,000 of equity allows up to $200,000 of open trades during the market day. If a trader wants to withdraw $10,000, his trading level must be kept to no more than $160,000 -- $40,000 times 4 -- for the next two days.
Working With a Plan
Successful day trading requires a trading plan, the discipline to implement the plan, and the ability to adjust it to changing market conditions, according to Markus Heitkoetter, author of "The Complete Guide to Day Trading." Part of day trading is the fact that there will be losing trades with every trading strategy. A day trader must be able to handle losses and understand that some of them cannot be avoided. A successful trader has more winners than losers, and keeps losses as small as possible.
Day Trading Risks
The SEC has published strong warnings about the risks involved with day trading, especially by novice traders. The SEC's website notes that most new traders will have significant losses before developing enough experience to trade profitably, and that many new traders never reach a level of profitable trading. The agency also warns against any offers, programs or seminars promising easy profits, hot tips or expert advice. In contrast to what the sellers of seminars and trading programs might claim, the SEC notes that day trading is stressful, full-time work in which it is as easy to lose money as make money.
- SEC: Pattern Day Trader
- SEC: Margin Rules for Day Trading
- SEC: Day Trading: Your Dollars at Risk
- "The Complete Guide to Day Trading," Markus Heitkoetter, 2008
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.