Sec pattern day trader definition

One thing I get asked all the time is if futures day traders like those at Samurai Trading Academy are impacted by the Pattern Day Trader Rule that applies to those trading stocks or options. The simple answer is no, because by their very nature futures contracts are short-term due to their expiration cycle.

Let's cut right to it - being a Pattern Day Trader is terrible. More rules, more requirements, more restrictions on your day trading business.

All right, so maybe that's a little bit harsh right off the bat. Let's back up a bit. What exactly is a Pattern Day Trader?

How does it change the way you trade? While this sounds all right in theory, it also severely limits participation in the market thus limiting liquidity and actually can increase a trader's market risk. Additionally, I don't know a lot of people who want to risk that kind of money when they are just starting out in their day trading career! The rules around being a pattern day trader first came into effect in during the collapse of the Internet-fueled stock market bubble.

At the time, everyone seemed to be calling themselves a "day trader' as they simply went long over and over during a hyper-active bull market, but eventually the market crashed and a lot of people and brokers were caught on the wrong side thanks to "cross guarantees" that led to unmet margin calls. This caused the SEC and FINRA to enact Rule , The Pattern Day Trader Rule , to try to prevent people from getting in over their heads in the future by requiring considerable funds to be in the account of any day trader using margin to buy and sell stocks.

Of course, while it sounded great for the government to try and protect people from themselves insert extra sarcasm here , this rule change came with some serious drawbacks as well.

This is how the SEC judges if you are a "sophisticated" trader. Drop below that number by a dollar and suddenly regulations tell you that you are not longer fit to participate in the market. This hardly seems like a reasonable definition of a trader's skill, in my opinion. Many professional traders actually use margin and leverage to their advantage, because it allows them to keep their amount deposited with a broker low so they can keep the rest of their trading funds in safer personal accounts.

These regulations take that power away from traders, forcing them to keep a substantial sum of money in an account with their broker at all times. Considering some of the recent issues we've seen with brokers like MF Global, is this really a safer option for a day trader?

Since you can only become a pattern day trader by executing day trades trades opened and closed within the same business day , this rule leads to many traders attempting to avoid this classification by holding trades longer than they otherwise might. A trader who is in a position they no longer consider to be high probability is now inclined to hold until the next day despite their better judgement, exposing them to increased risk of loss. Hardly a good way to "protect" day traders that the SEC envisioned, is it?

The best way to avoid being branded a pattern day trader by the various regulatory bodies is simply to trade securities where those rules don't apply. That said, the futures market is likely the best option overall due to the additional price transparency compared to Forex and the many other advantages of futures.

This allows a professional trader to keep a small account while still trading multiple contracts, while keeping their additional trading funds in their own personal accounts to access only if necessary. It also allows those who are new to trading to participate without having to take on significant financial risk.

The lower barriers to entry allows futures traders to get involved in an exceptionally liquid market with good volatility without needing to put aside a huge chunk of money right from the start. In recent years, futures markets have become increasingly popular due to the many advantages they offer to the professional trader. Any trader from complete novices to market veterans can get involved with a low minimum balance, reasonable costs and fees from their broker, and full price transparency from the central exchange.

Thanks for the article. Im just learning about trading so not sure which market to trade but will probably stay away from stocks because i want to start small. Emini futures and FX can both be good for smaller accounts, but make sure that your trading plan is in line with your account size.

Totally agree with you here.

78 FR

I hate this stupid rule! Why should I have to keep my money with my broker when I can keep most of my trading funds safely in my own accounts?! I basically avoided stocks entirely due to the extra regulations and mostly focused on Forex as well before spreading into futures. The Path to Becoming a Full Time Trader Building and Refining Your Trading Edge 4 Keys to Breaking Your Trading Plateau Strike While The Iron is Hot The 7 Best Price Action Patterns Trading Expectancy: The Power of an Edge Why You Don't Want to Be a Pattern Day Trader.

Futures trading contains substantial risk and is not for every investor.

Day-Trading Margin Requirements: Know the Rules | efulejeqih.web.fc2.com

An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or life style.

The Uniform Securities Act (USA) - Definition Part 1

Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. Facebook Youtube Rss Gplus Linkedin Twitter. How Money is Made as an Emini Day Trader Part Four: What You Need to Start Day Trading STA Trading System STA Training Program STA Training Program Overview STA Training Program FAQ STA Reviews and Testimonials Members Area Login Contact.

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