Day Trading - Stock Traders Glossary Terms

Yes, you have guessed right, I am a day trader, not only a day trader but a pattern day trader! Day trading is a type of trading strategy that involves buying and selling a security, such as a stock, within the same trading day. The goal of day trading is to profit from short-term price movements in the market. Day traders typically use technical analysis and charting tools to identify potential trading opportunities, and may use leverage or margin to amplify their potential profits (and losses).

In order to be considered a day trader, you must make at least four day trades within a rolling five-business-day period, and your day trading activities must account for at least 6% of your total trading activity in that same period. If you meet these criteria, you will be classified as a pattern day trader (PDT) by the Securities and Exchange Commission (SEC), and will be subject to additional regulations and restrictions.

When designated as a pattern day trader, individuals encounter specific limitations. The first rule entails maintaining a minimum equity of $25,000 in cash or securities within their margin accounts throughout the trading day, as mandated by regulatory guidelines. Failure to meet this requirement results in the suspension of day trading activities until compliance is restored. Moreover, the second rule governs a pattern day trader's buying power, which is capped based on the prior day's account balance, typically limited to four times the maintenance margin excess. Exceeding this limit prompts the brokerage to issue a margin call, allowing five business days for rectification, failing which trading on margin is prohibited for 90 days or until compliance is achieved. Brokerages may impose stricter regulations regarding margin calls, including restrictions on trading until compliance is met and the potential sale of securities without prior notice to fulfill the call.

Day trading can be risky, as it involves making trades based on short-term price movements that can be difficult to predict. Day traders must be disciplined, patient, and able to manage their risk effectively in order to be successful. Day trading is not suitable for everyone, and should only be attempted by experienced traders who have a solid understanding of the markets and their own risk tolerance.

In summary, day trading is a trading strategy that involves buying and selling a security within the same trading day. Day traders aim to profit from short-term price movements, and use technical analysis and charting tools to identify potential trading opportunities. Day trading can be risky and is subject to additional regulations and restrictions for pattern day traders.