Securities
Day Trading
Day trading is the practice of buying and selling securities within the same trading day, closing all positions before the market closes to avoid overnight risk and leverage requirements.
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Exam Tip
PDT = 4+ day trades in 5 days. Requires $25,000 minimum. Day trading buying power = 4x equity. Know the PDT rules!
What is Day Trading?
Day trading involves buying and selling financial instruments within the same trading day—all positions are closed before the market closes. Day traders seek to profit from short-term price movements and avoid overnight holding risks.
Key Characteristics
| Feature | Description |
|---|---|
| Timeframe | All positions closed same day |
| Holding Period | Minutes to hours |
| Goal | Profit from intraday price movements |
| Frequency | Multiple trades per day |
Pattern Day Trader (PDT) Rule
| Requirement | Details |
|---|---|
| Definition | 4+ day trades in 5 business days |
| Account Minimum | $25,000 equity required |
| Account Type | Margin account |
| Consequence | Account restricted if below $25,000 |
Day Trading Strategies
| Strategy | Description |
|---|---|
| Scalping | Many small profits on tiny price changes |
| Momentum Trading | Trade stocks moving significantly on high volume |
| Breakout Trading | Enter when price breaks support/resistance |
| Reversal Trading | Trade against overextended moves |
Day Trading Requirements
| Requirement | Purpose |
|---|---|
| Margin Account | Leverage for larger positions |
| Minimum Equity ($25K) | PDT requirement |
| Trading Platform | Real-time data and execution |
| Knowledge | Technical analysis, risk management |
Day Trading Buying Power
For PDT accounts:
- Day Trading Buying Power = 4 × Excess Margin Equity
- Example: $25,000 equity = $100,000 buying power for day trades
Risks of Day Trading
| Risk | Description |
|---|---|
| Capital Loss | Can lose significant money quickly |
| Transaction Costs | Commissions and fees add up |
| Emotional Stress | High-pressure decision making |
| Tax Implications | Short-term capital gains taxed at ordinary rates |
Day Trading Statistics
- Studies show 70-90% of day traders lose money
- Most successful traders have years of experience
- Capital preservation is key to survival
Day Trading vs. Other Styles
| Style | Holding Period | Trades/Year |
|---|---|---|
| Day Trading | Minutes to hours | 100s to 1000s |
| Swing Trading | Days to weeks | 50-100 |
| Position Trading | Weeks to months | 10-50 |
| Investing | Months to years | Few |
Exam Alert
Pattern Day Trader = 4+ day trades in 5 business days in a margin account. Requires $25,000 minimum equity. Day trading buying power = 4x maintenance margin excess. Know the PDT rules!