Pattern day trading rule explained
Pattern Day Trader Rule is a rule established by the Financial Industry Regulatory Authority (FINRA), a trading regulatory body in the United States, “to discourage excessive trading.” Margin trading accounts must contain at least $25,000 each day to minimize risk.
A “round trip” is simply opening and closing a security position. If you buy or sell to open a position, you have completed a round trip. You’ve made a day trade if you did it within one trading day.
Round Trip: There and Back Again
Is the pattern day trader rule applicable in the UK?
In short, the pattern day trader rule does not apply in the UK. You will not be bound by the pattern day trader rule if your broker is not regulated by FINRA – that is, if it is not regulated by an authority outside of the US.
IG is regulated by the UK’s Financial Conduct Authority (FCA), so this rule does not apply when opening a position with us.
What Exactly Is a Day Trade?
A day trade is when you open and close a security position on the same day.
Here’s how it works:
- Close and open (round trip). When we say “open and close,” we mean buying and selling, or selling (short) and then buying. This is also referred to as a “round trip.”
- Position in security. Day trading applies to virtually all securities, including stocks, bonds, ETFs, and even options (calls and puts).
- On the same day. When you do a round trip on the same day, it’s a day trade. A day trade is when you hold your security position beyond the close of the trading day.
Pattern day trading basics
It is the act of buying and selling the same financial market on the same day, such as forex or shares, on the same margin account. In order to qualify as a pattern day trader, you must use an account regulated by FINRA in the US, and execute more than four day trades on your margin account per week.
You use leverage when you trade with a margin account. You can open a position with a deposit and still get exposure to the full value of the trade. Margins will magnify your profits, but they will also magnify your losses.
Day traders who execute fewer than four trades in five days are still day traders – just not pattern day traders. You must also make more than 6% of your total trades from these trades.
Learn about different trading styles
Pattern day trading is a time-consuming activity, so you’ll have to monitor market prices and news regularly. For opening and closing trades, you should rely on thorough technical analysis. In addition, fundamental analysis can be used to prepare for upcoming economic events that may cause market volatility.
Pattern Day Trading: What Is It?
If you make four or more day trades (as described above) within a rolling five-day period, and those trades account for more than 6% of your account activity, you are a pattern day trader.
We will focus on two types of day traders:
- Traders who identify themselves as day traders. There are people who are actually day traders, which means their brokerage is aware that they intend to day trade and they meet the $25,000 minimum account requirement.
- The pattern of day traders. People who day trade in violation of the rules without having sufficient capital meet this requirement.
The Bottom Line
Breaking the pattern day trader rule is no fun. You might want to brush up on margin rules if you want to become a more active trader, maybe even day trade from time to time. If you can avoid violating the rules, or simply keep your account value well over $25,000, you will have less to worry about executing a short-term trade.
Watch this video to learn more about day trading:
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