Most people think they can make money with too much day trading.
Traders will incur high commission costs and become a Pattern Day Trader, if they day trade too much. They will be limited to closing out their positions, and worse they can be suspended from trading. Generally, they will have to deposit additional cash to make their account over $25k.
Some brokers will suspend traders’ privileges if traders violate the PDT rule.
However, the rule only applies to a margin account. Four day trades in a week is subjected to PDT rules.
Some brokers will allow only closing out positions and other will not.
In other countries, the PDT rule is not enforced, so traders need not worry.
On the contrary, people can actually day trade with a cash account, yet they cannot use leverage.
However, especially for beginners, traders are advised to use cash account, because their risk is limited only up to their deposit.
Now, traders can day trade with a cash account, and they can also over trade.
They can actually incur so many commissions, if they do that.
As to making money, they need to limit their trading costs.
What counts as a day Trade?
According to Tdameritrade.com, a day trade is opening and closing of security positions on the same day. (source)
It also includes pre-market and post-market transactions.
Traders refer this as intraday trades, because they make trades within the day.
The rule is also focused only on entries, and full or partial close-outs of entries are also considered as day trade.
This applies to almost all securities, either long or short.
For example, buying 200 shares of ABC and selling only 100 shares is considered one day trade. However, selling additional 100 shares before the close of the day is not.
Traders will have problems if they make multiple entries, and they close all the positions before the end of the trading day.
They will incur many day trades if they are not careful.
For example, making two entries and closing or partially closing both is considered a day trade.
Most people do not understand the rule, and they end up making a lot of mistakes.
Violating the rule will have some consequences.
So, traders should count their entries, and monitor their closeouts.
To avoid day trades, people can liquidate their positions after the close of the trading day.
The video below shows details of the day trade.
Pattern Day Trading Rule
Pattern day trading rule only applies to a margin account under $25k. Cash accounts are excluded.
Traders cannot day trade more than three times in a five-day rolling period. It does not mean it should be Monday to Friday, but a five-day period.
So, day trading on Tuesday will include day trades from Wednesday until Tuesday.
Traders cannot make day trades anymore, if they used up their three available trades in the past four days.
Well, people can deposit more money to their trading account to increase balance above $25k to day trade again.
However, it is too expensive.
So, traders have to wait until the five-day rolling period has expired.
It is dangerous when people trade volatile stocks, because they might not get out of their positions.
Some brokers may not allow them to exit their positions, and they may incur large losses.
For example, a trader bought a volatile stock, and the stock falls 20%. He will lose more money because he cannot exit his position on-time.
Now, this rule makes day trading even more difficult.
Traders should count how many day trades they have, so that they will not lose track.
Johndeo does not recommend day trading because of high costs and restrictive PDT rule.
Most brokers will deduct commissions and taxes when their clients sell stocks. To avoid additional costs, traders can sign-up to commission free brokers.
However, people have to pay taxes whenever they sell their stocks. (source)
The more day trades they make, the higher taxes they will pay.
Holding stocks for one year or less is taxed as short-term capital gains which can end up to 37%.
Now, how does commission free brokers make money?
They are actually making money from spreads and loaning or investing clients unused money. (source)
Traders pay more on the bid and ask spreads whenever they make their trades.
Beginners may not notice this, and they pay a lot of money when they over trade.
For example, a total of five percent commissions for a whole year is a lot of money. How much more is 10%
No wonder 95% traders cannot even make two percent profit in a year.
Gurus often advocate day trading, and beginners may believe them.
People should not believe day trading gurus online, immediately, because most gurus made their money from their subscribers and students.
Brokers may not allow traders who violate the PDT rules to trade for 90 days unless the trader’s account balance is above $25k.
This makes traders lose a lot of money because they may not be able to close their positions.
Imagine losing 30% to 50% of the account because one cannot trade.
It is devastating.
To avoid losing so much, traders should not trade too much.