The New Day Trading Rules
By Toni Hansen
Beginning September 28, 2001 margin
rules and requirements for one group of traders changed dramatically. The
new rules apply to traders categorized as Pattern Day Traders (PDTs) who
are defined as traders who make 4 or more day trades within a 5 day period,
unless his/her day-trading activities do not exceed 6% of his/her total
trading activity for that time period. Thus, if you have only 4 daytrades
in a 5 day period but have done more than 67 trades during that time, then
less than 6% or the trades were day trades and hence do not categorize
a trader as a PDT.
A day trade refers to opening and
closing a position within the same trading day. If you are in a position
with one entry of 1000 shares though and take two exits of 500 shares each
within the same day this is only considered one day trade. You could also
be categorized as a PDT right away without waiting to see your 5 day record
if your trading firm has reason to believe you will be a PDT. For instance,
if they trained you solely to day trade.
There are several main changes which
now affect pattern day traders. One is that PDT's must have a minimum of
$25,000 to open a margin account as opposed to previous requirements of
a mere $2000. Funds deposited into a day trader's account to meet the minimum
equity requirement have to remain there for at least two business days
following the close of business on the day the deposit was made. Many brokers
now require all PDTs to have the minimum $25,000 even if they are trading
from a cash-only account as the new rule is unclear about trading from
cash accounts. It does clearly prohibit it and yet, neither does it state
it is allowed.
Another major change is that PDTs
now have twice the buying power as they did before. While traders once
had access to 2:1 margin, they now have 4:1. Whether you choose to use
this increased buying power is completely up to you.
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