you are absolutely correct about the absurd scenarios that can and do occur via this PDT whereby investors/traders unwittingly or in an effort to preotect their positions violate the rule and have their accounts shut down and locked up for 5 -90 days when in effect they were merely exercising prudence and good money management. This is rule is fraught with hypocrisy on its face, and was passed IMHO by the gluttons in NY etc. in order to keep the playing field from being even. This is typical of abuse of unbridled power, and greed on Wall Street. PERIOD!
I stated that it was important for traders to also be knowledgeable and understand the markets they wish to trade in addition to be properly capitalized. Way too many people, not just in the late 90's, but even today, "decide" that they're going to make a bunch of money trading. That's a great goal ... if they're willing to do the necessary work. But oftentimes it's not a well thought out decision. Too many people want to take shortcuts. They want the profits and expect it to be very doable without investing the time to do fundamental research on companies, don't learn TA, may not understand how CPI, PPI, employment numbers can impact the markets. In short, many people don't understand what it takes to succeed. They just want to jump in and start trading. I never said $25K was a magic number. But someone with $25K and who understands the markets has a much better chance of success than someone with the same knowledge and $5K to trade with. What's the $5K trader going to trade? Penny stocks? Good luck. Maybe 100-200 shares of INTC, DELL, MSFT, CSCO? If they do the latter, they'll be hard pressed to make any real money if they're day trading. The small trade size works against them. However, if they position traded those stocks and waited until they had $1 profit they'd make $100 to $200 possibly. Intra-day they can't make nearly as much given the smaller intra-day range as well as the increased transaction costs they'd incur. Now if they had $25K (or more) they could buy 1000 shares of the above. Making 10-15 cents per trade could net them at least $85 to $135 on such trades. The 100 share trades might net $8 to $13. A 200 share trade would net $16 to $26. Every trader, especially beginners, will have their share of losing trades. The lower capitalized trader will have a much more difficult time growing their account based on the above examples of daytrading 100-200 versus 1000 share trades. Take someone opening a restaurant (or any other business). All things being equal (in terms of knowledge of the business) the business owner who is better capitalized has a better chance of success. Any business, trading included, hits rough spots and such can have an adverse financial impact on a company.
I think you're all missing the point of PDT. The SEC is fully aware that anyone affected by PDT would prefer not to be. The SEC philosophy is to protect you from yourselves.
Obviously your mind is made up. I can only laugh at the absurdity of the above statement. I'm sure the MM's at GSCO, MSCO, MLCO, BEST, SBSH, PRUS, UBSS, etc. are terrified of having to compete with the $5K wanna be retail traders. They're making markets, it's their PROFESSION, they have capital that these aspiring traders will never have access to. And they'd be trading against people who have a lot less knowledge and understanding of the markets. Analogy ... how about Tiger Woods playing a round against someone who just bought their first set of golf clubs? Or the Steelers (Seahawks, Patriots, ...) playing against a high school team?
Riskarb, I value your opinion so I'm interested in hearing your thoughts further on this. I understand that is the intention of the rule, but I don't believe that is what it is acomplishing. If that was their true intent, why would they make it so you can put on as many trades as you want in a day, but only take off one? Why not make it you can only put on one open position each day? why not make a % loss limit per day, instead of the 3 trades in a rolling period? Or make it super simple for everyone involved and make it only one trade per day period? Don't you agree that it is structured in a very peculiar way? Thanks, - The New Guy
However, if they position traded those stocks and waited until they had $1 profit they'd make $100 to $200 possibly. ** That is the problem you cannot really position trade either with the PDT rule. If one practice sound management one will be stopped out too often and the PDT rule kicks inn. Read my example in previous post. To avoid the rule kick in one need very wide stops or not using a stop the first day. And use longer holding periods; 2 weeks to 3 months. And ability to scale in and out is also limited.
Quote from riskarb: I think you're all missing the point of PDT. The SEC is fully aware that anyone affected by PDT would prefer not to be. The SEC philosophy is to protect you from yourselves. Perhaps more fruitful to discuss and argue against the above statement rather than arguing about any other underlying reasons.
How would you define a rule-based system that would place a limit on opening transactions? What if you're trading a $10k account and structuring a buy and hold portfolio of odd-lots in 60 issues? How to distinguish between the PDT and a passive investor? I agree that the rule is absurd and poorly conceived. Why penalize successful but undercapitalized traders? A loss-limit is problematic. I believe that extending the term to 30d and increasing the # trades which qualify would be an improvement. If nothing else it would represent a more statistically-valid sample of the trader's buy/sell pattern. The PDT is detrimental to daytraders and passive investors alike, but it's not likely to be reversed until the SEC makes some internal changes. A move towards SPAN for equity markets will be a seed-change.
Quote from riskarb: I think you're all missing the point of PDT. The SEC is fully aware that anyone affected by PDT would prefer not to be. The SEC philosophy is to protect you from yourselves. As iceman already have pointed out ; alltough the intention and philosophy of protection might be good it does not achive its purpose and is probably doing more harm than good. So I do not think we are missing the point. This rule is not very well thought out. If they could adjust and apply this rule to daytrading only it will get closer to it's philosophy. But as it is now, position trading are affected also. A few stops and some errors and the account is locked.