Last week a subscriber wrote and mentioned that he was getting
in and out of trades more quickly than he had in the past and had even
entered and exited the same position in the same day. That action
resulted in a warning from his broker about day trading. Though I
certainly do not consider myself to be a day trader, I do enter and
exit positions at least occasionally on the same day, I am aware of
the day trading requirements established by the NASD and by my own
brokerage firms.
"The following general requirements regarding day-trading have
been imposed by the NASD:
Pattern Day-Traders are characterized by transacting four or more
stock or options day-trades within a five-day period in a margin
account.
Pattern Day-Traders must maintain at least $25,000.00 in account value
in order to continue day-trading practices.
In the event that a Pattern Day-Trader does not maintain $25,000.00 in
account value they will be required to provide cash-on-hand for
same-day stock transactions.
Additionally, an account may be flagged for day-trading if it
regularly recycles funds within the same day, for example, an investor
sells a security (stock or option) for a premium of $400 and proceeds
to purchase another security (stock or option) for $400 when no other
capital is available and prior to funds being cleared.
If an account becomes designated as a pattern day-trading account and
does not maintain the minimum required equity, at least $25,000.00, a
call will be issued which must be met within 5 business days,
otherwise the account will be restricted to Cash only for a period of
90 days or until the account equity is brought above the minimum
equity requirement or at least $25,000.00."
The NASD Day-Trading Risk Disclosure Statement also sets out
some considerations for the potential day trader (one who uses an
overall trading strategy characterized by the regular transmission by
a customer of intra-day orders to effect both the purchase and sale of
the same security or securities).
Undoubtedly one should consider these as serious warnings.
Among the points made by the NASD, are that day trading can be
extremely risky and is not appropriate for someone who has limited
resources and/or limited trading experience. The trader should be
prepared to lose everything used for day trading. They also indicate
that "certain evidence" indicates that an investment of less than
$50,000 will significantly impair the day traders ability to make a
profit.
As if that isn't enough, the NASD also points out that day
trading on margin could result in losses beyond the initial
investment. Multiple commissions, of course, add to the difficulty in
attaining profits.
I am not a great fan of day trading since so many have lost so
much through the practice. I am on board with the NASD's advice to be
cautious of claims of large profits from day trading. Certainly, some
have made fortunes day trading, and for that reason it can be
tempting. Many more, however, have been losers so heed the cautions
and do your homework before considering the strategy. Even after
achieving an understanding of the significant risks, the prospective
day trader needs to understand his own trading emotions very well and
be able to attain great discipline before putting any money at risk.
Good Trading!
Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader
You can comment on this article!
Mr. Kraft's past articles are posted on our website for your review.
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The foregoing is commentary for informational purposes only. All statements and expressions are the opinions of Online Investment Services, LP. or the associated editor. This information is not meant to be a solicitation or recommendation to buy, sell, or hold securities. Past results do not guarantee future performance. Stock investing is risky. Option trading is risky. Futures trading entails great risk where one can lose more than his account balance. We are not licensed or registered in the securities or futures industries. The information presented herein and on the related web sites is presented "as is" without warranty of any kind either express or implied. Although the information has been obtained or derived from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolios of writers for this issue may, in some instances, include securities mentioned herein and on the related web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors. No one associated herewith receives compensation in any manner from any of the companies that are discussed in this newsletter or on the related websites. By accepting emails, including various paid subscriptions and free email reports and newsletters, you agree to the terms of the MarketFN.com's website Disclaimer, Privacy Policy and Terms of Use provisions as such may be amended from time to time.
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