Did you know day traders account for 10% of stock trading volume in the US?
It’s understandable as day trading seems like the talk of the town. But before you start, you have to be aware of certain rules and restrictions.
In this guide, we’ll walk you through everyday trading rules and restrictions on US stocks. So, if you are planning to start day trading, stick with us till the end.
What is Day Trading?
Let’s start with the basics first.
Unlike long-term investments, where you buy stocks and hold them for months or even years, day trading is all about quick moves.
Day traders buy and sell stocks within the same day, usually in a matter of hours, sometimes even minutes. The goal of day trading is to profit from small price changes within the same trading day.
The phrase, “Buy Low Sell High” becomes “Buy Low Sell High within one Day.” For day trading.
It’s important to note that it’s not all about guessing the direction of the stock. It’s a game of timing, having the right tolerance, and having some degree of risk tolerance.
Thanks to the internet, anyone with some capital, knowledge, and the right platform (we’ll get to those later) can try their hand at day trading.
Let’s come to the main part of the guide, and talk about the rules and requirements of day trading.
PDT Rule
The PDT rule is one of the most important rules you can’t ignore if you intend to day trade stocks in the US.
It prevents beginners from opening more than three trades in a rolling five-trading-day period. The rule is set by FINRA (Financial Industry Regulatory Authority) whose purpose seems to be the protection of beginner traders.
The rule states that to conduct over three-day trades within a rolling five-business-day period in the US, you need at least a balance of $25,000 in your trading account at all times.
If you violate this rule, your broker will tag you as a “Pattern Day Trader” and freeze your account for 90 days for cash-only transactions.
The reason behind this rule is that the trader should be allowed to have a sufficient amount of capital to absorb losses.
You would probably be thinking, “Oh no, $25,000 is too much for me. How am I going to maintain this balance?”
Luckily, there’s a way around this. When you trade with prop trading firms like TradeThePool and FTMO, you don’t have to put up your $25,000. They provide the capital you require, and in return, you share some percentages of your profits with them. It’s one of the best ways for new traders to dodge the PDT rule while still trading like a pro.
Margin Requirements
Let’s assume you are eyeing a stock, but don’t want to put up the full price. You can use margin trading to borrow money from the broker to buy a larger number of shares. In the US, if you are a day trader, there is a minimum margin requirement; 25% of the total market value of the securities in your account.
However, if you are flagged as a Pattern Day Trader, which we just reviewed, you will need that $25,000 minimum balance, and this balance must be maintained in the account at all times to meet the margin requirement.
So, what does this mean for you?
If your account falls below that level, you may get a margin call, meaning your broker’s asking you to add more money. And if you cannot meet it, they can sell some of your assets to bring the balance back up.
But, what is the easiest way to get over this requirement?
You can trade with prop trading firms such as TradeThePool or FTMO. They give you the capital, so you don’t need to worry about such strict requirements.
Time Requirements
Something that beginner day traders tend to forget is that the stock market is not an all-day activity.
In the US, activity hours NYSE and NASDAQ, are from 9:30 AM to 4:00 PM. EST. These are the hours when most day trading does occur.
However, if you want to trade outside of those hours, there’s also an option. Most brokers let you trade during the pre-market and after-hours sessions.
Generally, pre-market trading occurs between 4:00 AM and 9:30 AM, and after-hours trading exists between 4:00 PM and 8:00 PM EST.
Sometimes, it can work to your advantage, but it does have its downsides.
Fewer people are trading outside these hours, and prices can fluctuate with more volatility, and it may be harder to sell at, or for, the price you want.
How Prop Firms Can Help in Day Trading Stocks?
Capital requirements, the PDT rule, or margin restrictions can be a low blow if you want to day trade stocks in the US. However, proprietary firms, aka, prop firms like TradeThePool and FTMO allow you to day-trade without these hurdles.
These firms let you trade using their capital. Instead of coming up with your own $25000 to get around the PDT rule or risk your own money, you get to trade with the firm’s capital. In return, they share a small percentage of your profit.
It’s not just about these rules. Knowledge is an important aspect of day trading. So, TradeThePool and FTMO provide advanced tools and educational resources, so you can get one step ahead of others and trade effectively.
Final Thoughts
Day trading can be a lucrative opportunity for new traders. However, understanding the rules and requirements in the US is important if you want to trade in the long run.
Remember, day trading is all about knowledge, discipline, and risk tolerance. If you don’t know anything about stock trading opening an account with prop firms can be the best first step.
