Have you ever wondered what the difference is between a day trader and a pattern day trader? Although they are essentially the same, you’ll need to know the basic differences if you want to get into day trading.
What is a Pattern Day Trader?
According to the Financial Industry Regulatory Authority (FINRA), a pattern day trader is any customer who executes four or more day trades within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period.
It’s also important to note that under FINRA rules, day traders need a minimum of $25,000 in your account and you can only trade in margin accounts. If day traders take a few losses and their equity falls below $25,000, they won’t be able to day trade until the account is replenished. This can also be done by using a combination of cash and securities.
Are You a Pattern Day Trader?
If you buy and sell, or sell short and then cover the same security during the same trading day, that is considered a day trade. If you do this four or more times within five business days, and the number of day trades is more than 6% of your total trading activity during that time, you’re considered to be a pattern day trader.
If you don’t do the required number of day trades in five business days, you are not considered a pattern day trader and won’t be subjected to the $25,000 requirement either.
If you’re planning to actively trade every day, then you need to understand these rules.
Day Trading vs Pattern Day Trading
A day trader is someone who buys and sells security in the market within in the same day. There are no special requirements to be a day trader and many traders don’t even have access to large trading houses and firms, thanks to the Internet. However, pattern day traders are required to follow stricter requirements according to FINRA rules.
Examples of Day Trades
Let’s take a look at some examples of pattern day trading. For example, let’s say you buy 300 Microsoft (MSFT) shares. You then sell 300 shares in the same trading day. This is considered a day trade. If you do this three more times during five business days, FINRA considers you as a pattern day trader.
If you have a small account or do not want to open an account with over $25,000, you could look into other potentially profitable trading styles.
The Bottom Line
Those who are looking to become day traders need to understand the pattern day trader rules. By now, you should know whether becoming a pattern day trader is for you. However, if you don’t think it’s the right fit for you, there are other ways to become a profitable trader.
Need more tips on how to become a pattern day trader? Go ahead and schedule a free training session.