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An Introduction to Day Trading

Mar 20, 2008
While being a day trader used to be a personal decision that the government had no interest in, the Security and Exchange Commission (SEC) recently stepped in and developed some day trader account management rules that you may become subject to depending upon how you trade.

There is a new category of day trader called the "Pattern Day Trader" or "PDT". This definition applies to people who make four or more day trades within any five day period, but only if those trades exceed six percent of that person's total trading activity in the same time period.

What is a Day Trader?

A day trader is an investor who opens and closes a position in the same trading day. For example, if you buy 10,000 shares of XYZ at 11 AM, and sell all 10,000 shares at 1:30 PM on the same day, then you completed a day trade. Do that enough times within 5 days and you are a Pattern Day Trader.

What are the new SEC rules?

If you are determined to be a PDT then you are required to maintain a minimum balance of $25,000 in your margin account. Traders who are not subject to the new rules only need to maintain a $2,000 balance in their margin account.

Because the SEC rules are not clear, many brokerage houses require PDT customers to maintain a $25,000 balance even if they are trading from a cash account.

Is Day Trading right for you?

Day trading is not something to be entered into lightly. While there is a great opportunity for gain, there is an equal opportunity for loss. Day traders require a great degree of knowledge and skill in order to be consistently successful. Of course, no one is born with that knowledge and skill and there are plenty of ways to learn all about day trading if you think that you are interested.

It takes discipline to be a day trader. Greed and fear are the two biggest enemies of day trading investors. When you get too greedy you set yourself up for losses by having too much money invested at once, or by not exiting a trade when you should. Fear stops you from making a trade because you don't want to risk losing the money, or it forces you to close a position earlier than you should because you think it's going bad on you.

Day trading is very risky and you should never invest more than you can afford to lose. Yes, you can earn a full time living being a day trader, but more people fail than succeed, so you have to be prepared for the worst.

Your best bet is to find a day trading program or strategy that you are comfortable with and then stick with it. There are plenty of strategies available, but remember this: Past performance is never indicative of future results. What worked yesterday for day traders may not work today. Trade responsibly!
About the Author
Caterina Christakos is an experience investor and internet entrepreneur. To learn how to diversify your portfolio go to: http://www.commoditiesandfuturesexplained.com
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