Day Trading

[aiki14]

Recently a few folks have detailed concerns and questions about Day Trading.
Over the next few posts I will attempt to explain the concept and it ramifications as best as I can, and provide some resources. I urge the experienced folks to chip in with corrections and clarification. Before I even start here's the definitive site for all info about trading:

http://www.sec.gov/

OK here goes

What is "Day Trading"
It is a status denoted by the NASD (FINRA) and the NYSE that refers to a subsection of Rule 431 which is the Margin Requirements Rule.

The Term "pattern day trader" (we'll use day trader or PDT from now on) is defined as "any customer who executes 4 or more day trades within 5 business days, provided the number of daytrades is more than 6% of the total trades in the account during that period."

A trade is an in and out transaction in this context (buy and sell one position), a Day trade is a trade that takes place during the same market session (uy and sell same position in the same session)

What must you do if you have the status
Maintain $25,000 in the account, two accounts mean $50,000, not assets under management with the firm. And you can't use equity in another account to guarantee against a margin call (cross guarantees)
In addition to the standard portfolio margin requirements you must meet Day Trader Margin requirements, either of the following:
25% of the cost of all day trades made on that day
or
25% of the highest open position (time and tick data must be used)

Resource:
http://www.nyse.com/pdfs/im01-9Microsoft%20Word%20-%20Document%20in%2001-9.pdf

Can I Day Trade in a cash account?
No, do whatever you want. You'll be restricted to settlement rules but that's it.
Some old timers are racing to tell me I am wrong here, and I thought so too but here's the deal. The Day Trading rules are under the margin rules to protect the system and the Broker not the Trader. They protect the B/D by preventing overleverage on unsettled trades, cash trades have no leverage associated and can't put the B/D to any more than value risk. I have been in margin accounts and have gone in and out of PDT status so many times I didn't remember this.
What also may have fooled people is that sometimes your broker will allow an unsettled funds trade (in-out-in, or out-in-out in less than t+3 days) and then freeze the account to cash only trades for 90 days. This is similar to what happens if you fail to make a margin call in 5 business days but falls under a different set of regs.

Ok, here's a SEC publication called Day Trading: Your Dollars at Risk
http://www.sec.gov/investor/pubs/daytips.htm
We're presumably adults here, so I am not preaching as to what I think of your chances if you decide to be a Day Trader.

[aiki14]

Where Can I find info?

Ask Luc1Grunt :)

He's a busy guy, so I'll throw a few things out there, I take no responsibility and make no warrant as to the value of these references except where indicated:
http://www.sec.gov/ (in case you missed it above, this is the final authority on all things Trading)
http://www.finra.org/index.htm ( Formerly the NASD, I'll vouch for them :) )
https://www.nasdaqtrader.com/ (For specific info on Nasdaq securities)
http://www.tradingacademy.com/
http://www.tradejuice.com/

Give Luc a second try :)

[Luc1Grunt]

Excellent post and I would urge Thierry to "Sticky" this and add "reference and Regs" to the title.

I think you covered it well Aiki.

Thanks for the links as well.....good to have in the favorites. :D

[Luc1Grunt]

Just got the chance to open this: Can't wait to explore this after some business. Thanks again!

http://www.tradejuice.com/

[AJLightning]

one of my friends asked Scottrade about removing his margin status and have a cash only account so he can day trade more. the guy told him it doesn't matter because he's already been flagged as a PDT? so no matter if he had the funds or not to day trade, he couldn't do it? he had enough to do several day trades and still wait out the T3 rules

[Luc1Grunt]

one of my friends asked Scottrade about removing his margin status and have a cash only account so he can day trade more. the guy told him it doesn't matter because he's already been flagged as a PDT? so no matter if he had the funds or not to day trade, he couldn't do it? he had enough to do several day trades and still wait out the T3 rules

AJ, not sure what is being asked here???

Hey Thierry, Aiki started a great thread here.....how a bout a sticky?

This seems to be a topic many are interested in and through time will provide valuable resources right at the top of the forum.

What do you think?

Anyone else?

[netwrangler]

Hey Thierry, Aiki started a great thread here.....how a bout a sticky?

This seems to be a topic many are interested in and through time will provide valuable resources right at the top of the forum.

What do you think?

Anyone else?
Agree that this is a 'core' topic for traders. Moreover, Aiki's first two posts, and the links they contain, are resources of on-going value. IMHO the thread is a good candidate for a sticky. [Course, I may need stickies more than most readers here...being memory-challenged and all.]

One thought — I see two additional topics that are closely related to day trading:

General margin requirements and the use of leverage
Requirements for different levels of option trading

Perhaps these could be companion threads? The common [you should excuse the expression] thread here is that these are topics of interest to mainstream investors who are thinking about doing some trading. Having threads dealing with these topics adds value to the Forum in their eyes.

[Luc1Grunt]

Some additional links:

www.prophet.net (http://www.prophet.net)
www.traderslaboratory.com (http://www.traderslaboratory.com)
www.tradersconsortium.com (http://www.tradersconsortium.com)
nazdaq heatmap....google it, very good pre-market tool.
http://www.mindovermarket.com/mindovermarkets/pivot.asp?SYMBOL pivot tool

www.stockfetcher.com (http://www.stockfetcher.com)
http://www.breakpointtrades.net/HowToUse.html
www.elitetrader.com (http://www.elitetrader.com)

[CarlJ]

Thanks for posting this. I'll be reading for a while again.:wink:

[Firecracker]

Here's info from scottrade that may help:

Trading in Cash Accounts

Interpretations of Regulation T, which govern how trades are paid for, state that funds from liquidations in cash accounts will not be available to pay for purchases until the settlement date of the sell.

Credit balances in a cash account may be used for purchases.

 If the account has settled funds, there are no restrictions as to what may be purchased.
 If the credit balance is a result of an unsettled sale of securities, certain restrictions may apply.
 Unsettled proceeds from existing long positions can be used to purchase additional securities as long as the new purchase is not sold prior to the settlement date of the original sale that generated the proceeds used to finance the purchase.
 If it is sold prior to the settlement date of the funding sale without additional funds being deposited, it will be considered a free ride under Federal Reserve Regulation T.

Mutual Funds and Fixed Income Securities can only be purchased with existing or settled funds.

Examples:

Monday 5/1/XX: sell 1000 (ABC) stock for $10,000.00 – Sell has a settlement date of 5/4/XX.

 You make a purchase of 1000 (XYZ) for $10,000.00 on 5/4/XX, using the settled proceeds from the sale of 1000 (ABC) shares from 5/1/XX.
 Since the 5/1/XX funds have settled, you are free to use those funds to make purchases of stocks on 5/4/XX, and sell those stocks at anytime without having to bring in any additional cash to pay for the purchases.

You sell 1000 (ABC) stock on Monday 5/1/XX for $10,000.00 – sell has a settlement date of 5/4/XX.

 You then buy 1000 (XYZ) for $10,000.00 on Tuesday 5/2/XX. Since you have used the proceeds from a sale that has not settled yet, to make a purchase, you cannot sell the 1000 (XYZ) stock until 5/4/XX.
 If you sell the securities that were purchased with unsettled proceeds, on 5/2/XX, before the proceeds settled, then you must bring in additional funds to cover the $10,000.00 purchase.
 If you do not bring in additional funds, then you will be charged with a free ride.

You have 10 (ABC) call options long in your account. You sell the options on Monday 5/1/XX, generating $300.00 in proceeds. You then use the proceeds to buy $300.00 worth of (XYZ) stock, also on 5/1/XX.

 If you hold those shares of (XYZ) stock until the options sale proceeds settle, on 5/2/XX, then you may sell those shares at any time you want without bringing in any additional money to pay for the purchase.
 If you sell the (XYZ) stock the same day that you bought the stock, the option sale would not have settled yet, and you would have to bring in an additional $300.00 to pay for the purchase of the (XYZ) stock.

You begin the day with a cash position of $10,000 on Monday 05/01/XX. The first thing you do is a buy of 1000 (ABC) stocks for $10,000 Then you sell those securities on the same day generating $10,100.00, which settles on 05/04/XX, and use the money to buy 1100 (XYZ) shares for $10,100.00, again on 05/01/XX.

 If you hold the 1100 (XYZ) shares until Thursday 05/04/XX, you can then sell those 1100 (XYZ) shares whenever you want without having to bring in any additional funds.
 If you sell those 1100 (XYZ) shares before Thursday 05/04/XX, then the 05/01/XX sell of 1000 (ABC) would not have settled yet and you could not use those proceeds to pay for the 05/01/XX purchase of 1100 (XYZ) shares.

 In this case you would need to bring in additional money to pay for that purchase.

You begin the day selling $5,000 of a Mutual Fund (ABCDX) on 05/01/XX. This Fund has a settlement date of 05/04/XX. You wish to purchase $5,000 of DEFGX on 05/01/XX using the ABCDX proceeds.

 This Mutual Fund could not be purchased until 05/04/XX because the ABCDX has not settled.

There are other scenarios that may apply to your trading.

 Regardless of the security and your trading patterns, please keep in mind to avoid any restrictions on your account, you can only purchase with settled funds.

Non-retirement accounts have two basic choices.

 Your first option is to provide sufficient cash in the account to support the desired level of trading.
 Your second option is to sign a margin agreement, which will allow you to trade without the 3 business day hold on sales proceeds.

A consideration with the option of signing a margin agreement would be the requirement by industry regulations, that if you do 4 roundtrips (A buy and a sell on the same day) in a five-day period, you will be considered a pattern day trader and will be required to maintain $25,000 minimum equity in the account.

There could also be interest charges that would apply on any debit balances past settlement date.

[netwrangler]

Here's info from scottrade that may help: Yes it did.
Thanks for a helpful post.