February 7, 2014

The Requirements Which Determine YOU As a Pattern Day Trader

Trading is the practice of buying and selling shares of a public corporation’s stock. A day trade occurs when the speculator — the individual purchasing or selling the share(s) — initiates a trade after the previous market day’s end and closes the trade before the current market day’s end. A day trader is an individual who participates in pattern day trading: the execution of four or more day trades within a period of five market days as long as the total number of day trades exceed six percent of the individual’s total number of trades for that period.

What are the risks of pattern day trading?

Pattern day trading is very extreme in that the trader is likely to be either extremely successful or extremely unsuccessful. While long-term holding is subject to corporate politics, mergers and acquisitions, quarterly sales and profits, etc., day trading is subject to the flaws of human psychology. Day traders do not maintain their positions long enough for the performance of the company to significantly affect price fluctuations, however a single rumor, accurate or not, may be sufficient to cause other traders to perceive a potential rise or fall in the value of the company’s stock. The affluence or impoverishment of a trader is determined by the trader’s understanding of human psychology and whether he or she can accurately predict the reactions of other traders to rumors, news, or reports about the company being traded.

How does one participate in pattern day trading?

Pattern day trading is regulated and monitored heavily by the Securities and Exchange Commission (SEC) because of the incredible financial risks of this practice. To be considered legally able to participate in pattern day trading, the trader must maintain an equity balance of at least $25,000 in a margin account or must refrain from executing a day trade for a period of 90 days if he or she fails to meet this requirement. A margin account is an account with an exchange service that is maintained by a trader. The margin offered by the exchange service allows the trader to borrow equity to initiate trades, amplifying the possible gains or losses from the closure of the trade. This requirement helps to protect amateur traders who are likely to suffer significant losses as a result of the substantial fluctuations of a share’s price within a market day.

Make sure you understand the regulations which apply to this type of trading..

Carl Croft

Carl is an active trader of forex, stocks and commodities who mainly uses charting and candlestick strategies. An author on various trading websites and is admin here!.