David Waring

In our last lesson we finished up our discussion of trading stocks on margin, with a look at how to monitor our margin levels on the ThinkorSwim platform. In today's lesson we are going to start a new discussion, on the rules and regulations relating to daytrading

As many of you probably remember, the 1990's brought both the advent of the online trading platform, as well as the dot com speculative bubble. As the NASDAQ stock market was headed to the moon in pretty much a straight line upwards, everyone and their brother was making use of the easy access that online platforms offered to the market, to make money day trading tech stocks.

What many people didn't realize at the time, was that we were in the midst of one of the biggest speculative bubbles in history, and on March 10th 2000 (my birthday by the way), a top in the NASDAQ was put in, and the market promptly sold off from a high of 5132 to a low of 1132 3 years later. Needless to say many people who thought they were geniuses when the market was going straight up, got absolutely crushed on the way down.

So what does this have to do with daytrading rules and regulations? Well, because so many people lost money daytrading equities during the bubble, the regulators decided that the days of letting anyone who wanted to daytrade the stock market to be able to without restriction were over. So the SEC issued new regulations which are referred to as the pattern daytrader rule, and states the following:

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, will be labeled pattern daytraders. Traders who are labeled Pattern Day Traders must maintain at least $25,000 in equity in their account on any day that they place a day trade.

For anyone who does not already know, a daytrade is referred to as any trade that is opened and closed within the same trading day. As a side note here, if a trader opens a position and then uses two orders to close that same trade, then this is counted as 1 daytrade.

If a pattern day trader exceeds the day-trading buying power limitation, the firm will issue a day-trading margin call to the pattern day trader. The pattern day trader will then have, at most, five business days to deposit funds to meet this day-trading margin call. Until the margin call is met, the day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on the customer's daily total trading commitment. If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.

For those of you who are trading on the ThinkorSwim platform, the platform conveneiently keeps track of how many daytrades you have made and alerts you as to the number you have left whenever you login to the platform.

Thats our lesson for today and that wraps up our module on the logistics of stock trading. For my next series of lessons I would love to have your input as to what you would like to learn about, so please leave your thoughts in the comments section below.

As always if there are any questions or other comments please feel free to post them in the comments section as well, and good luck with your trading!

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Tekmnd

" Traders who are labeled Pattern Day Traders must maintain at least $25,000 in equity in their account on any day that they place a day trade."

I believe there are some ways around this rule. There are a couple of brokers that will allow you to open an account that only has to maintain a level of $5k. The broker then loans you $20K and puts it in your account, so you have the required $25K, however, you can only trade with the original $5k you put in.

Tek

David Waring

Hey Tek,

Glad to hear from you.

I think you are referring to proprietary trading firms which as I understand it you can daytrade with less than 25K. I think the danger here is that when you open an account with these firms in that manner then you trade a firm account in that firm's name, so if the firm goes bankrupt you are in danger of losing your account. I am a little foggy on how all this works so if anyone could shed some additional light on the topic I would appreciate.

Also, below is a link with a list of proprietary trading firms for anyone who is interested:

http://www.tradersnarrative.com/list...firms-735.html

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

wasabi137

can u give me any brokers?

Tekmnd

Well that just sucks lol

I wrote out a reply at home last night, but somehow it didn't post. I must have closed the window too fast or something. I will re-write a response when I get a chance (maybe tonight).

Cheers
Tek

Tekmnd

Sorry about the delay in responding. I found that the information I was given about this has changed, so I will describe what I know-

I first heard about this when I was checking out a site that sold a system for scrape trades (I forget which site). Although I am not a big believer in these types of systems, the site had lots of free information on it. One of the things the site stated was what I posted about brokers that will loan you money, etc.

I emailed the site and asked them for the names of the brokers, and they sent me 2 links. The first was to a site that is still being built-
Reach Your Trading Potential - WTC - Getting Started, Sub-Contractor Application

The 2nd link was to a site that is a proprietary site like Dave mentioned above-
Online Trading
I checked it out, and how it seems to work is that you trade with their money; however you put up a $5k deposit. (In other words, they are providing 10:1 leverage.)
They act as the broker (making commissions off of your trades). They provide level 2 platforms that you pay for, training, etc; however, if you place enough trades, many of the things are provided free.
They let you trade with $50K of their money, however you can only lose up to your $5k deposit.

In some ways it sounds pretty good. What I do not like about it though is that what I was originally told seems to be different than what it really is, and that raises red flags. Also, it seems to be just begging you to ignore risk management.

Cheers
Tek

wasabi137

i'm a little skeptical...has you or anyone tried these 2 platforms out?

Tekmnd

I have not done more than check out their websites. Other than that, I know nothing about them.

Cheers
Tek

sudhaker

I think PDT is a LEGAL SCAM by FINRA in favor of big institutions and it always hurts people with small capital. I hate PDT and it should be abolished ASAP.

I hesitate in placing a tight stop-loss because it may trigger same day and I'll be left with only 2 more day-trade for next 4 days. Without this hesitation I could have gone out quickly with minimal loss. But this hesitation put me in to famous psychological trap and caused bigger loss.

Please help me understand how is this helpful to anyone with small capital?

Thanks,
Sudhaker

David Waring

Hi Sudhaker,

Glad to hear from you.

I am not in favor of this rule either as I feel like people should be able to do whatever they want with their own money. With this being said, I think the people who put this rule into place most likely genuinely thought they were doing a good thing and protecting people from losing money.

I don't think it is a scam because I would think that it would be much more profitable for the market makers if the smaller traders, who statistically lose more money than larger traders, were allowed to daytrade.

That's just my opinion though I could be wrong on this one.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.