Day trading

Day trading is a form of speculation in securities where traders buy and sell financial instruments within the same trading day to capitalize on short-term price movements.

The goal is to profit from these fluctuations by closing all positions before the market closes, thereby avoiding overnight risks and price gaps. Day traders often use technical analysis and various strategies such as range trading, spread trading, fading, and momentum trading to execute their trades. Day trading typically requires fast trade execution, sometimes as fast as milliseconds, and often involves the use of direct-access day trading software.

Established Rules

Pattern day trader (PDT)

A Pattern Day Trader (PDT) is a regulatory designation for when a trader executes four or more day trades within any five business days using a margin account. A day trade is defined as the purchase and sale, or sale and purchase, of the same security in a margin account on the same day. The Financial Industry Regulatory Authority (FINRA), who regulates brokers, requires that if a trader engages in such activity, their account will be flagged as a PDT account by their broker. Once flagged, the trader will be restricted from day trading until the account equity is restored to $25,000. Additionally, the trader cannot trade in excess of their “day-trading buying power,” which is generally up to four times the maintenance margin excess as of the close of business of the prior day. If a PDT account falls below the $25,000 requirement, the trader will be limited to liquidating trades only and will have up to five business days to deposit funds to meet the call.

It’s important to note that the PDT rule applies only to margin accounts and does not apply to cash accounts. Furthermore, some broker-dealers may use a slightly broader definition to determine whether a customer qualifies as a PDT. Customers should contact their brokerage firms to determine the specific rules and requirements for their trading activities. To avoid the PDT rule, traders can opt for a cash account, open multiple margin accounts with different brokers, open an offshore account, or open an account with a prop firm. However, these options may come with their own set of restrictions and requirements.