If a day trader makes four or more day trades in a rolling five business day period, the account will be labeled immediately as a Pattern Day Trade account. Certain limitations will then be applied based on the account equity. Account equity is the amount of cash that would exist if every position in the account were closed.
This is also known as the liquidation value. There are also restrictions on the dollar amount that they can trade each day.
If they go over the limit, they will get a margin call that must be met within three to five days. Further, any deposits that they make to cover a margin call have to stay in the account for at least two days. The pattern day trader rules were adopted in to address day trading and margin accounts. Increased access to margin - and therefore increased leverage - can be one of them. For non-pattern day trade accounts with standard access to margin, traders may hold positions in value up to twice the amount of cash in their account.
Pattern day trade accounts will have access to approximately twice the standard margin amount when trading stocks. This is known as Day Trading Buying Power and the amount is determined at the beginning of each trading day. When trading stock, Day Trading Buying Power is four times the cash value instead of the normal margin amount cited above. Leverage and margin are trading tools and are meant to be used wisely. Financially speaking, leverage is when a small amount of capital is able to control a much more expensive asset or group of assets.
When trading and investing, leverage has the ability to magnify the skill set of the trader. If traders are not proficient, losses will rack up more quickly and in larger amounts when using margin. A decline in the value of stock purchased may cause the brokerage firm to require additional capital to maintain the position. Absence of an immediate additional capital infusion may cause the broker to liquidate client positions at its discretion.
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Become a day trader. Informed, Uninformed, Intuitive Informed Traders: Caution for pattern day traders If traders are not proficient, losses will rack up more quickly and in larger amounts when using margin.
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