How Many Trades Does It Take to Be Considered a Day Trader?

Day traders buy and sell within a single market day.

A day trader is a securities trader who holds securities positions for less than the market day. Day trades are opened after the market opens and closed out by the end of the stock exchange day. There are day traders who trade in the commodity and futures markets as well as forex, but the stock market is where there is an exact definition of what is a day trader.

Definition

The Financial Industry Regulatory Authority -- FINRA -- puts an exact definition on what it calls a pattern day trader. An account is designated as pattern day trading if four day trades are made in the account in any five day period. The only exception to the rule is if the four or more day trades account for less than 6 percent of the total trading activity of the account. The pattern day trading designation is applied to the specific brokerage account. Only margin accounts -- not cash accounts -- can be designated as day trading accounts.

Considerations

In practice, a trader who places one day trade a day or more will have her account designated as a pattern day trading account. The 6 percent rule means that to not be designated as a day trader, the trader would need to make more than 20 additional longer term trades per day to avoid the designation. A margin account allows the trader to borrow money from the broker to pay for part of the cost of traded securities. A cash account -- not authorized to borrow -- cannot be used to day trade due to other FINRA restrictions.

Effects

The biggest surprise to the trader who gets hit with a pattern day trader designation is the increased equity requirement for the account. A regular margin account is required to have at least $2,000 in customer equity. A day trading account must have $25,000 in customer equity. The equity amount is the difference between the value of the securities in the account and the margin loan from the broker. Equity is the trader's money. When a trader's account is designated as day trading, he must make sure there is $25,000 in equity or make a deposit to bring it up to that level.

Benefits and Restrictions

It is not all bad to be designated as a pattern day trader. Day trading accounts are allow up to four times leverage for day trading activity. This is double the leverage allowed in a regular margin account. On the other side of the increased leverage, traders are not allowed to withdraw the equity that supports the leverage for at least two business days. A trader using her full leverage potential must reduce the size of her trading for at least two days to make a withdrawal from the account.

References

• FINRA: Margin Requirements for Day Trading Customers