Intraday trading is commonly known as day trading. Trading intraday means trades are opened and closed during a single market session. In the Forex and futures markets, there are no differences in the rules for intraday or multi-day trading. However, there are a different set of rules for intraday trading of stocks than there are for traders who hold stock positions for longer than one day.
Pattern Day Trader
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) use the term pattern day trader to indicate a stock brokerage account used for intraday trading. An account will be designated as a pattern day trading account if the trader executes four or more intraday stock trades in any five business day period. Once designated, the account will stay as a pattern day trading account, and the trader must abide by the day trading rules. Only brokerage margin accounts can be used for intraday trading.
The SEC rules require a day trading account to maintain a minimum trader equity level of $25,000. This is significantly higher than the $2,000 equity requirement of a regular margin account. Trader equity is the total value of securities in an account minus any outstanding margin loan. If the account is used solely for intraday trading, all trading positions would be closed by the end of the stock market day, leaving only cash in the account. In this case, the cash level must be at least the $25,000.
A regular margin account allows a trader to use a margin loan to buy stock worth up to two times the account equity. Pattern day trader rules increase the leverage available up to four times the trader's equity when making intraday trades. For example, a trader with $50,000 of account equity could have day trading stock positions worth up to $200,000 open at any one point during the trading day. The extra leverage allows day traders to make larger profits on small share price changes.
Trader equity used to support trading at the four times leverage level cannot be withdrawn from a pattern day trading account for two business days. This means that a day trader who makes a big profit in one day cannot withdraw the gain the next day. To withdraw money the trader must reduce her trading activity for the two business days. For example, assume a trader with $50,000 of equity wants to withdraw $10,000 from her account. She must limit her trading level to a daily maximum of $160,000 in open trades for the two days, using just $40,000 of the equity to support intraday trading.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.