#346 - The Ultimate "Quick" Guide To Day Trading Rules

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Sep 3, 20183m
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#346 - The Ultimate "Quick" Guide To Day Trading Rules
Sep 3 '183m
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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, I want to go through our ultimate quick guide to day-trading rules or what's commonly referred to as pattern day-trading rules or PDT rules. The idea behind these rules are basically the way for an industry or a broker to put in place some sort of adopted principles that prohibit people from being pattern day-traders or day-traders without having enough capital to support that. Now, I think it's a little bit confusing because sometimes people think that if you make a bunch of trades on the same day that you’re automatically classified as a pattern day-trader, but that may not be the case. The actual rules may differ from broker to broker, but the general consensus is that if you are entering and exiting the same security four to five times in the next course of four to five business days, then that may trigger some alerts in your broker system that would tag you as a pattern day-trader.

Now, the key here is that you are buying and selling the same security in the same day. You would have to buy stock and then immediately sell stock that same day and you’d have to do that type of activity multiple times over the course of a business week for you to really be tagged as a pattern day-trader. Now, this also means that if you are entering a lot of trades on one day, but you are not necessarily closing out of those trades the same day, then that won't trigger any pattern day-trading rules or requirements. Now, what happens is when you are triggered or tagged as a pattern day-trader, you then must have a minimum equity balance of in many cases, $25,000 on the day that you actually establish those day-trades. What the industry is trying to do is again, make sure that people who are trading very quickly in the market have enough equity and enough capacity or collateral to cover a lot of their trades or their activity.

Now, as options traders, what we do here at Option Alpha is we do have a lot of activity every single day, but we are not day-traders, nor are we pattern day-traders. We enter a lot of trades, but our trades are 40 to 60 days out which means that although we might have five or six opening orders in one day, we will not immediately go back around and close those orders the exact same day. We’ll wait a couple of weeks to close trades or we’ll let our auto-trading software close trades for us. Hopefully this helps out. As always, if you have any questions on this, let us know and until next time, happy trading.

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