Rules For Pattern Day Traders - Know the Regulations Before You Trade

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First, what makes a trader a "day" trader? A traders goal is to make money from the difference that occurs from the price he paid to buy a stock to the price he sold the stock at. Day traders focus on that same goal, but do not hold a stock for very long, usually one day or less, hence the name. An intra-day trader is one that will trade the same stock during the same business day. Day traders have rules that regulate their activity. Those regulations have been in place for over seven years, and most traders are aware of them by now, but for new traders there might still be some questions.

A pattern day trader is only slightly different in definition and activity from a regular day trader. You go from being a day trader to a pattern day trader by making four (or more) trades in five business days on the same trading account. A trading account can be designated as a day trader account automatically upon being opened, as it would take the defined action to change the account to a pattern day trading one.

The rules and regulations that are in place to govern day trading accounts and their activities specify how much "power" an account has per day, using a basic formula. That formula looks like this: Four times maintenance excess= Day Trade Buying Power (DTBP). Are you curious about what maintenance excess is? That also needs a formula, and that looks like this: Total positions+ total cash= total equity

Total positions- non-marginable positions=margin equity.

Margin equity-maintenance requirement=maintenance excess.

DTBP is the amount of action that you can make on your trade accounts during one days time.

If your goal is to be a pattern day trader with any success, you must understand the minimum trade equity amounts. Each account will have a set amount that must be met to establish a day trading account. That amount is generally $25,000, with a more specialized account needing $30,000 as its minimum. If an account does not have that amount in it, an "equity call" will be made- the call is simply a warning that until the amount is met, you can not make cash based trades. Once the call is made, you have a set period of time to bring the amount up to the minimum after which you may have your assets liquidated to cover the amount needed.

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Source by Anthony Cusimano