A pattern day trader, under the definition of the United States Securities and Exchange Commission, is a trader who executes at least four day trades within five business days. These day trades should be more than six percent of the client’s total trading activity for the same five-day period for the trader to be called a pattern day stock trader.
Because of the numerous activities, pattern day traders are relatively more exposed to intraday and day trading risks. Consequently, these traders are made subject to specific rules and restrictions. One of these rules is maintaining a minimum of $25,000 equity balance in a margin account. If the day trader’s account falls below the required minimum, he or she needs to restore the required amount through cash deposits or marginable equities within five days of going below the requirement.
Pattern day trading is considered a very risky style of market trading. Because of this, the Securities and Exchange Commission has established numerous rules to address intraday risks. One of these rules requires that a trader’s maintenance margin be deposited in customer accounts in amounts enough to support the risks associated with day trading. Moreover, if the minimum amount required is not met, the day trading power of the trader will be frozen for 90 days or until the minimum equity required is re-established.
There have been arguments from various sectors of the market that the establishment of these rules hinders the basic philosophy of a free market. Some have also asserted that the rules actually enhance the risks faced by a day trader, particularly in situations when the unexpected decrease in equity price occurs.
Despite the risks and stringent rules to day trading, a lot of traders are drawn into the profession because of the alleged potential profit that can be made from it. A lot of people, particularly those who are not so adept in stock trading, have the impression that day trading is a quick way to make a lot of money. However, market analysts have warned that this isn’t so, and some of them even argued that the risks do not justify whatever potential benefit can be gained from day trading.
Being a pattern day trader has its advantages and disadvantages. The debate on whether this is a profitable endeavor is still on-going. One thing is for sure, though, day trading should not be chosen as a profession unless a trader has thoroughly studied the market and weighed the pros and cons of this practice.