For traders who getting in and out of the same position on the same day, you definitely need to know this....
Day trading requirement established by Nasdaq and most of the brokerage firms:
- Pattern Day-Traders are characterized by transacting 4 or more stock or options day-trades within a five-day period in a margin account.
- Pattern Day-Traders must maintain at least $25,000.00 in account value in order to continue day-trading practices.
- In the event that a Pattern Day-Trader does not maintain $25,000.00 in account value they will be required to provide cash-on-hand for same-day stock transactions.
- Additionally, an account may be flagged for day-trading if it regularly recycles funds within the same day, for example, an investor sells a security (stock or option) for a premium of $400 and proceeds to purchase another security (stock or option) for $400 when no other capital is available and prior to funds being cleared.
If an account becomes designated as a pattern day-trading account and does not maintain the minimum required equity i.e. minimum $25,000.00, a call will be issued which must be met within 5 business days, otherwise the account will be restricted to Cash only for a period of 90 days or until the account equity is brought above the minimum equity requirement or minimum $25,000.00."
The Nasdaq Day-Trading Risk Disclosure Statement also sets out some considerations for the potential day trader (one who uses an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both the purchase and sale of the same security or securities).
One should consider these as serious warnings because day trading can be extremely risky and is not appropriate for trader who has limited resources and/or limited trading experience. The trader should be prepared to lose everything used for day trading. They also indicate that "certain evidence" indicates that an investment of less than $50,000 will significantly impair the day traders ability to make a profit.
In addition, day trading on margin could result in losses beyond the initial investment. At the same time, with multiple commissions incurred will definitely make it more challenging to attain profits.
On a neutral ground, there are traders who make a fortune from day trading and that make it very tempting for a lot of people. At the same time, there are a lot of people lost so much through day trading. So, we should do our homework before considering this strategy.
Other than obtaining an understanding of the significant risks, the prospective day trader needs to understand his own trading emotions very well and be able to attain great discipline before putting any money at risk.
Happy trading!
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