Dumb Question: Daytrading rule

Does this only apply if you are trading on margin?

 

That is correct. If you have a cash only account, you can trade the bejebbers out of your $2k. Note that one needs a margin account to short stock . . .

 

Strange...In my IB account when I sell something the proceeds aren't listed uner "cash" until the next day. I haven't tried to trade it yet, maybe I should.

 

From what I know, the PDT rule is interpreted differently by different brokers. For example, Freetrade lets you trade your cash account as many times as you want, i.e. if you have $5K in the account, you can open new positions upto $5K in value throughout the day as long as you close the previous position. But, IB's interpretation is a bit more strict, and they will lock you out of trading once you've made the 3 day trades in a 5-business day period.

 

The thing is, they aren't even day trades. They are positions from a few days ago I closed out.

 

I think you have to wait for the trade proceeds to clear before you can trade them again. That takes three days. Some brokers seem to let you use the money right away, others do not. Very confusing and makes it tough to keep track of an account with a lot of trading.

 

The rule is one put forth by the Federal Reserve Board. Pattern Day Trader is someone that make 4 round trips (roundtrip = 1 opening (buy / short) and 1 closing (sell /cover) trade for the same security). That's the definition of a round trip as far as the industry majority, and the FRB.

Once you meet that, you will need to have $25,000 equity in your account, if you don't, you will get a call. In return, the FRB allows 4 to 1 intraday and 2to1 (Reg T) overnight. However, as we all know there are many firms that offer 10,20 and 30 to 1. One of the caveats that you will find from firm to firm is how the trades are journaled: FIFO or LIFO, which may contradict the PDT rule. The clearing firms and corresponding firms (B/D's) that work with them, know this rule inside and out.

In case you didn't know, the rule was a direct result of the US Senate investigation of Day Trading. This is the way the govt controls the market, with it's regulation of the mkt (SEC) and regulation of margin (FRB). They keep daytrading margin rule sin effect for everyone that has $25K, and keeps out those who don't. If you don't have the $25K for daytrading, there are firms out there who will lend the capital. Hope that helps, good luck.