Same Day Swing Trading Rules

Swing trading is a method somewhere between buy and hold and day trading. Futures, currency and stock traders use swing trading. Often it takes just days to turn a profit. If day trading doesn't suit your disposition, but you want to make money quickly, then swing trading might be right for you. There are a few rules to follow for swing trading stock to avoid problems with same day trades.

History

FINRA established same day rules about day trading to protect those that couldn't afford to lose money, but weren't cautious enough. Same day swing trading rules apply when you buy and sell the same security in one day. This is a round trip day trade. If you do make round trip trades four or more times in a five-business day period, you become a pattern day trader. That's something that you want to avoid. A pattern day trader has very strict rules to follow once the brokerage labels the account.

Rules

Pattern day traders have to keep a minimum of $25,000 in equities or cash in their account all the time. If the market takes a big slump, and your equities drop below the $25,000 mark, you receive a margin call. The call requires you to make up the difference in cash within 5 business days. Beware, if you think, you'll deposit it and then remove it the next day. It doesn't work that way. You have to leave the funds in the account for a minimum of 2 business days. Pattern day traders can't use cross guarantees either, to meet the minimum. They have to do it with only funds in the account. If you don't meet the minimum for the margin call, then the brokerage house must restrict your account for 90 days to liquidation transactions only. The SEC states that only cash transactions take place during this time.

Pitfalls

Avoid the pattern day trading label by limiting your day trades to 6 percent of your total trades for the account for the 5-day period. If you're an active swing trader, make sure that you track your day trades so you don't exceed this percentage. If you have over 100 trades in the 5 day period and just make 5-day trades, your percentage is only 5 percent, so you meet the "less than 6 percent rule."

Warning

Be aware that if you're labeled a pattern day trader and have over $25,000 in your account but don't time trades properly, the brokerage house might make a day trade margin call on your account. A pattern day trader normally has the ability to trade up to four times the margin excess in the account. This calculation of this amount uses the time and tick of the trades, in other words, it calculates them after you execute each trade. Presume that your account had a $25,000 surplus beyond the minimum. This gives you $100,000 day trading buying power, since it's 4 times the surplus. If you bought BZD stock at 10:00 a.m. for $100,000, then about 2:00 p.m. you purchased MOR stock for $50,000 and one minute later sold BZD for $120,000, you'd have a margin call the next day. Had you sold the BZD stock before you purchased MOR, you would not have the call.

Solution

A good swing trader already keeps a log of all executed trades. If you do a round trip day trade, make sure that there's a place on your log to note that it was a day trade. Keep a separate notation for the previous 4-day trades so you don't accidentally fall into the category of the pattern day trader. Remember day trading opportunities occur all the time. Don't restrict your account unnecessarily with too many if you wish to swing trade.