Pattern Day Trading
One who carries out four or more trades in five working days is called a pattern day trader. U.S. Securities and Exchange Commission has set a minimum equity limit of $25,000 for anyone who wishes to carry out pattern day trading. In case the equity falls below $25,000; the trader's account is frozen!
What is Day Trading?
Day trading is the act of purchasing and selling financial instruments in a single day. The person who carries out this practice is known as an 'active trader' or a 'day trader'. Common day trading financial instruments include stocks, stock options, currencies, and a number of futures trading like equity index, interest rates, and commodity futures.
The day trading activity serves as a preserve for financial houses, professional investors and individual stock market operators. Most of the active traders are bank and investment company executives working as specialists in equity investment and fund management.
However, with the coming of electronic trading and margin trading, this activity has become progressively popular among casual and commercial traders.
Day trading involves a lot of risks and hence, it is necessary to know them, before one enters this field.
- In a field that involves quite a lot of money related transactions, there are bound to be unavoidable losses. So, the trader has to be careful while investing. New entrants in this field are more susceptible to huge losses, as they are yet to learn the rules of the trade.
- Trading is a highly stressful job. The market keeps on fluctuating and the trader has to keep himself updated with the latest trends; making it a full-time job.
- Most of the traders do not invest their own money, instead they borrow money and then invest it. If one suffers loss, then he will have to pay his debts as well.
- Markets are unpredictable. If proper research is not carried out, the predictions may go wrong and the trader can suffer losses.
Tips for Success
Even though there are risks involved in this business, if one is careful, he is bound to gain profits. The following tips can prove to be useful:
»If you are thinking of getting into day trading, and want to earn good money, you necessarily need to have the fundamental understanding of how the stock market works.
»The best thing about day trading is that you are your own boss. Of course, that does not mean that you shouldn't treat it as a business, or overlook the discipline which is needed to become proficient in the business. It is very important to put the essential time and efforts for planning, executing, and reviewing every single trade.
»Since you are your own boss, you have the alternative of working from wherever you desire. You may prefer to work from home, start your own office, or even work on your laptop while traveling or on a trip.
If you choose to work from home, you can certainly save on traveling expenses. You may even set up your own office for carrying out the trade transactions. All you require is a computer with Internet access, and an online trading account for conducting business.
»If you are into day trading, it is recommended to sign up for a level 2 account that renders greater levels of analysis as compared to ordinary accounts. This is the most preferred way of day trading, as unlike in ordinary accounts, you need not sit in front of the computer continuously and check for updates every minute of the day.
The time spent watching the stock market will affect the pattern of your trading and also the frequency of buying and selling securities can be altered as per the current market condition.
»Moreover, when it comes to day trading, you can be flexible with the working hours, as much of the stock research can be conducted at a time which you find suitable. However, it is very crucial to be aware of the key hours during a particular trading day.
»Always review your performance at the end of every month. It gives you a clear idea if some policies of yours have gone the wrong way.
»It is a good practice to check all the property terms when you are dealing with cash or other valuable assets.
»In case the trading is done in foreign markets, it is better to know all the legal considerations of the market before investing a huge amount of money.
»A newcomer to the trading business should always start small. It is advisable to go slow, keeping the trading restricted to one stock per day. In this way, trader will be able to make small but sure profits. The number of stocks can then be slowly increased.
If you want to be one of the many successful day traders in the stock market, you need to get knowledge about the stock market as much as possible and day trading techniques. Day trading has become popular for making money fast with ease. However, it needs to be done in the correct manner to be successful.