Written by A.J. Brown

Pattern Day Trader

The market has been wildly volatile lately. We’ve witnessed swings as large as 800 points in a single direction.

What’s more, the market is down more than 2,000 points since September 2, 2008.

Given these huge price movements, it has become more risky than normal to leave option positions open overnight… and especially risky to leave positions open over the weekend (have you seen the huge gap downs the last few Monday mornings?).

But here’s the thing. If you close positions too often, you could get tagged as a “pattern day trader.”

A pattern day trader, defined by Exchange Rule 431, is “any customer who executes 4 or more round-trip day trades within any 5 successive business days.” Source: Wikipedia

There is an exception:

If, however, the number of day-trades is more than 3 but is 6% or less than the total number of trades that trader has made for that five business day period, the trader will not be considered a pattern day trader and they will not be required to meet the criteria for a pattern day trader.

The bottom line is you can be classified as a pattern day trader if you open and close positions too frequently. And if this happens, you will have to adhere to a set of onerous rules.

For instance, if you get tagged as a pattern day trader, you will immediately be required to maintain at least $25,000 of equity in your trading account at all times. If your balance ever falls below this level, you will face an immediate margin call to bring your account up to the minimum equity level.

These rules make it nearly impossible for beginners to be day-traders or even swing traders.

So, if possible, it makes sense to avoid too many round-trip day trades in a week.

On the other hand,  the risk is still there. With the market swinging hundreds of points in both directions, you are exposed to big potential losses when you keep positions open overnight.

So what do you do?

While I can’t give you specific advice, I can share what we’ve been doing here at Trading Trainer. And I will share that strategy with you in the next post. Watch for it in the next few days.

Best regards always,

A.J. Brown

13 Responses to “Pattern Day Trader”

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  1. Day Trading Books @ 8:05 pm:

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    Kind regards,
    Barry

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