What are the rules for day trading? (2024)

A day trade occurs when you open and close a position within a single trading day. These types of trades can include:

  • Buying a security outright (what's called "long") as an opening transaction and then selling as closing transaction
  • Borrowing shares of a security, and selling them as an opening transaction (This is also called a "short sale" or "shorting.") and then buying the same position long as a closing transaction.
  • Shorting a security as an opening transaction and buying the same position long as an opening transaction
  • Buying a security long as an opening transaction and selling the same security short as an opening transaction

Are all day trades subject to special requirements? Yes, all day trades are subject to day trade requirements. However, if you make four day trades in a five business day period, you're classified as a pattern day trader and subject to specific margin requirements.

What are the margin rules for pattern day traders? The Financial Industry Regulatory Authority (FINRA) requires brokerage firms to monitor pattern day trading accounts, which are subject to the following special margin rules:

  • Minimum equity requirement: As a pattern day trader, you are required to hold a minimum of $25,000 in your account at all times. This can be a mix of cash and securities. If your account falls under this minimum, your account will be restricted until you've deposited enough cash or securities to meet the minimum equity requirement.
  • Day trading buying power: The rules for pattern day traders and non-pattern day traders also affect the dollar amount you can day trade in a single day. Your day trade buying power is always determined on close of business values. Which means you will likely have a new buying-power amount every morning. Your day trade buying power is calculated by adding the firm maintenance excess (FME), equity in your account in excess of your current maintenance requirements, to available cash. That sum is then divided by your broker's margin requirement for the security you are day trading, which at Merrill is normally 30% for fully marginable securities (those trading over $10.00 a share and listed on a major exchange).

    Here's an example: if you start the day with cash plus firm maintenance excess of $3,000.00, your day trading buying power would be $10,000.00 ($3,000.00/0.30 = $10,000.00). In this example, you can buy 100 XYZ shares for $6,000, and 100 ABC shares for $4,000. When these opening transactions are closed, you are credited back the opening price, and your gain or loss will affect the following trading day's day trade buying power and the current day's buy and hold buying power (a security you wish to hold overnight). So if you sell all your XYZ shares, you will have the full purchase price ($6,000) credited back to your day trade buying power, regardless of how much you gained or lost on the XYZ trade. This is sometimes referred to as "recycle" or "time and tick."

    If you exceed your day trading buying power with an opening transaction, any trade above the limit will need to be held overnight. If you close the position, you will also receive a day trade call and your account could be put on restrictions.

  • Day trade call: If you surpass the limit on your day trading buying power and close the position in the same day, your broker will issue a day trade call, requiring you to provide more funds to return the account to compliance. For pattern day trading designated accounts, you have two days after settlement of the day trade. During this time, you may trade only twice your firm maintenance excess. If you don't meet the call, you'll be placed on a 90-day restriction period, during which you can only trade on a "cash available basis," which is the equivalent to your current firm maintenance excess, until you satisfied the call. Time and tick will also be unavailable. If you are a non-pattern day trader, you won't be restricted until incurring three unmet day trade calls within a 12-month period. Once restricted and the day trade call is not satisfied, the account will remain restricted for 90 days. Funds deposited to meet a day trade call must remain in the account for two full business days, not including the date of deposit.

When you purchase securities, you may pay for the securities in full, or if your account has been established as a margin account with the margin lending program, you may borrow part of the purchase price from Merrill. If you choose to borrow funds for your purchase, Merrill's collateral for the loan will be the securities purchased, other assets in your margin account, and your assets in any other accounts at Merrill. If the securities in your margin account decline in value, so does the value of the collateral supporting your loan, and, as a result, we can take action, such as to issue a margin call and/or sell securities in any of your accounts held with us, in order to maintain the required equity in your account. If your account has a Visa® card and/or checks, you may also create a margin debit if your withdrawals (by Visa card, checks, preauthorized debits, FTS or other transfers) exceed the sum of any available free credit balances plus available money account balances (such as bank deposit balances or money market funds). Please refer to your account documents for more information.

Before opening a margin account, you should carefully review the terms governing margin loans. For Individual Investor Accounts, these terms are contained in the Margin Lending Program Client Agreement. For all other accounts, the terms are in your account agreement and disclosures. It is important that you fully understand the risks involved in using margin. These risks include the following:

  • You can lose more funds than you deposit in the margin account. A decline in the value of securities that are bought on margin may require you to provide additional funds to us to avoid the forced sale of those securities or other securities in your account(s).
  • We can force the sale of securities in your account(s). If the equity in your account falls below the maintenance margin requirements or Merrill's higher "house" requirements, we can sell the securities in any of your accounts held by us to cover the margin deficiency. You also will be responsible for any shortfall in the account after such as sale.
  • We can sell your securities without contacting you. Some investors mistakenly believe that they must be contacted for a margin call to be valid, and that securities in their accounts cannot be liquidated to meet the call unless they are contacted first. This is not the case. We will attempt to notify you of margin calls, but we are not required to do so. Even if we have contacted you and provided a specific date by which you can meet a margin call, we can still take necessary steps to protect our financial interests, including immediately selling the securities without notice to you.
  • You are not entitled to choose which securities in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, we have the right to decide which security to sell in order to protect our interests.
  • We can increase our "house" maintenance margin requirements at any time including on specific securities experiencing significant volatility and are not required to provide you advance written notice. These changes in our policy may take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause us to liquidate or sell securities in your account(s).
  • You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to you under certain conditions, you don't have a right to the extension.

If you have any questions or concerns about margin and the margin lending program, please contact the Merrill Investment Center at 855.332.5920.

MAP6513358-10192025

What are the rules for day trading? (2024)

FAQs

What are the restrictions on day trading? ›

First, pattern day traders must maintain minimum equity of $25,000 in their margin account on any day that the customer day trades. This required minimum equity, which can be a combination of cash and eligible securities, must be in your account prior to engaging in any day-trading activities.

How many day trades can you make in a day? ›

A day trade is when you purchase or short a security and then sell or cover the same security in the same day. Essentially, if you have a $5,000 account, you can only make three-day trades in any rolling five-day period. Once your account value is above $25,000, the restriction no longer applies to you.

Can you get in trouble for day trading? ›

Day trading is not illegal when it is done within normal trade hours and properly recorded. However, a similar practice known as late day trading is illegal and can be prosecuted under commodities fraud law.

What are the requirements for a day trader? ›

Starting as a day trader requires you to open a brokerage account, have a minimum equity of $25,000 and have the ability to conduct at least four trades within five business days.

Why do you need $25,000 to day trade? ›

The $25k requirement for day trading is a rule set by FINRA. It's designed to protect investors from the risks of day trading. By requiring a minimum equity of $25k, FINRA ensures that investors have enough capital to absorb potential losses. But remember, even with $25k, day trading is still a high-risk activity.

Can you day trade with only $1000? ›

Believe it or not, you can start forex day trading with $1,000 or even less. It requires mastering position sizing and managing risks, but if you navigate your way to success, the rewards can be significant. In this article, we will discuss in detail how you can day trade with $1000.

How to avoid being flagged as a day trader? ›

Monitor your day trades.

Placing fewer than 4 day trades in any rolling 5 trading day period will help avoid a PDT flag.

Can you make 200 a day with day trading? ›

A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.

How do day traders pay taxes? ›

Day-trading tax rates

Day trading taxes can vary depending on your trading patterns and your overall income, but they generally range between 10% and 37% of your profits. Income from trading is subject to capital gains taxes.

Why is day trading not worth it? ›

Day trading is a high-risk, high-reward strategy. If your decisions don't work out, you can lose money much more quickly than a regular investor, especially if you use leverage. A study of 1,600 day traders over the course of two years found that 97% of individuals who day traded for more than 300 days lost money.

How long does a day trader hold a stock? ›

Yet there are differences between a pattern trader and a day trader. Pattern traders typically hold their positions over a few days up to several weeks. On the other hand, day traders close their positions within the same trading day.

Can I sell a stock immediately after buying it? ›

How Long Do You Have to Wait to Sell a Stock After Buying it? Technically, there is no waiting period. You can sell a stock seconds after buying it. However, frequent day trading might classify you as a 'Pattern Day Trader' by the Financial Industry Regulatory Authority (FINRA), which carries certain requirements.

What is the 10 am rule in trading? ›

Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.

How does the IRS determine if you are a day trader? ›

You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation; Your activity must be substantial; and. You must carry on the activity with continuity and regularity.

What are the limitations of day trading? ›

Downsides of Day Trading
  • High probability of losses. Day trading is a high-risk, high-reward strategy. ...
  • Fees and taxes. While trading costs are lower than in the past, you could still owe fees for certain types of trades, especially at high volumes. ...
  • High stress. ...
  • Time-consuming and challenging. ...
  • Requires deep pockets.
Apr 16, 2024

Is there a limit to how much I can trade in a day? ›

There are no limits on the amount of trades, or the total volume of trades you can make daily. However, there are usually limits set for the minimum amount for trades (e.g.: 25 USD) and sometimes for the maximum market order amount.

How many times can you buy and sell the same stock in one day? ›

Just as how long you have to wait to sell a stock after buying it, there is no legal limit on the number of times you can buy and sell the same stock in one day. Again, though, your broker may impose restrictions based on your account type, available capital, and regulatory rules regarding 'Pattern Day Traders'.

How many hours a day can you day trade? ›

Less than an hour is typically spent trading by many part-time traders. However, full-time traders typically trade for two to five hours a day, which is a greater amount of time.

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