Are settlement rules different for daytraders?

Discussion in 'Trading' started by IronFist, Dec 8, 2005.

  1. I'm a newbie to all of this. Sorry if this has been covered before.

    I have an account with Scottrade (I'm not a day trader), and it says there are rules about funds settling after a trade, and what you can do with that money in the meantime. So basically, if you buy and sell, you can buy again with the funds from the first trade, but you can't sell this second position until the first one has settled, which takes 3 days.

    So are day traders immune to this rule? I would think that with trading multiple positions per day with a large percentage of their trading capital, they would violate this rule in a day or two.

    What am I missing? Thanks.
  2. Please help a n00b out. None of the 54 people who have viewed this thread are day traders?
  3. The rules you mention are for cash accounts trading stocks. Either get a margin account with $25K or trade futures to get around this.

  4. I have also encounted this rule. It's called "free-ride". It seems that violating it will cause serious consequence.
  5. And on that note, doesn't day trading give you 4:1 margin? So if it takes $25k to open a day trading account, how could anyone trade with less than $100k?

    Second question: If you have $25k in your day trading account and you lose money on your first trade and it drops down to $24,500, do you lose your day trading abilities because you're now under $25k?

  6. rwk


    There is no 'day trading account' per se. There are cash accounts and margin accounts. There is a pattern day trade (PDT) rule that requires day traders to maintain at least $25k balance at all times. A trader can trigger PDT rules in a cash account. If a trader triggers the PDT rule, and his account balance is below $25k, he must add funds or quit trading. In a margin account with a $25k balance, a trader can buy up to $100k worth of stock, but only intraday. The margin requirement is 50% for holding overnight.
  7. There's day-trading and there's pattern day-trading. You can day-trade with a cash account or a $2000 margin account. A margin account will give you 2:1 (or better) buying power.

    If you have > $25K, you can elect to be a pattern day-trader. If you day-trade more than 3 times in a rolling 5-day period, the broker will usually automatically flag you as one, whether or not you have $25K. If you have less than $25K, you'll be locked out for 90 days. See below.

    Being a pattern day-trader gives you 4:1 margin during the day, but you still have to get down to 2:1 (or whatever your broker requires) by the end of the day.

    If you're a pattern day-trader and your equity not including options drops to less than $25K, you're prevented from opening any new positions for 90 days. You can fix this by getting your balance back above $25K by adding money or closing positions. Or you can tell the broker that you no longer want pattern day-trader status (there's a limit to how often you can do this. Some say it can be done only once, some say it can be done no more than once every 180 days).

    If you're just starting out, it may be better to take it slow and NOT do pattern day-trading until you get some experience.
  8. I wasn't planning on day trading for a while. I was just curious because I'd read about these rules, but never the situations about which I asked.

    So I think I understand now why some people have two accounts: one for day trading and one for longer term investments.

    What about the "free ride" thing I asked about (first post)? If you have $100k in your account, and on your first day you intraday trade two $45k positions, after you sell them later in the day, is that $90k tied up and you can't use it for 3 more days until the trades settle? Or are these rules waived for PDTs?
  9. Those rules are waived for Margin accounts, even if you never actually use margin.

  10. Only time I've got nailed "free riding" was in an IRA account that I didn't wait out the 3 day settlement before I made another purchase.

    IRA means no margin ... and my broker finally lifted the trading restriction after a couple weeks and a few phone calls.

    I think the real problem the OP had was his account was not setup as a margin account, or trading stocks not marginable at Scottrade.
    #10     Dec 9, 2005