We’ve talked a lot about developing and following personal rules for day trading in order to achieve consistency. Personal rules are important, and methodology and established processes are at the core of any day trading strategy.
However, as essential as a tailored plan is, there are some regulatory rules which day traders need to be aware of. Being familiar with these guidelines decreases your chances of being caught off-guard and experiencing setbacks in your account.
Here are three regulatory rules that every beginner trader needs to know.
The Uptick Rule
If a stock drops more than 10%, it triggers SSR, a short sale restriction. This rule means that short sellers cannot beat down a stock that’s already taking a significant hit. Short sellers will only be able to sell once an uptick has been registered.
If this is the first time you’ve learned about this rule, you may have been waiting to jump in on the bid and missing your chance.
So if you want to take a short position on a stock that’s rapidly dropping in price, you need to short on the ask. If you try to chase it on the bid and can’t get an execution, a great opportunity might be lost, and you’ll end up feeling frustrated. So keep this rule in mind when shorting stocks.
If you have less than $25,000 in your account, the PDT (pattern day trader) rule states that you can’t actively day trade with those funds. That means that you can only have three round-trip trades within a 5-day period. If you violate this rule, your account may get triggered as a PDT account, resulting in your getting locked out.
This is a common rookie mistake made by day traders early in their careers. What comes after a lockdown is unique to your broker and situation. While some brokers forgive the first violation, and the duration of a lockout varies.
If you are trading with a cash account, settling the funds after your last trade execution takes two days. That means that you won’t be able to use the same funds to place another trade until the funds have officially settled.
Some traders like to avoid the PDT rule by opening cash accounts, which may or may not work well depending on your situation. However, not everybody is aware of the unsettled funds rule, and those traders are in for an unpleasant surprise.
So if you don’t want to wait for two days for your money to get cleared, you can stick with a margin account. But be aware, the PDT rule will apply.
If you don’t have a problem with the amount of time it takes to settle the funds in a cash account, you can still trade as often as you like. To be successful, it is going to take some adjusting and planning ahead. Simply put, you need to make sure that you have enough funds for multiple trades. That way, you don’t have to wait for your executions to settle. You will also have the advantage of limiting your buying power per trade to allow multiple transactions at a time if the opportunity presents itself.
Knowing these rules will help you navigate the world of day trading. And if you’d like more tips for beginners and experienced traders alike, check out Cobra Trading educational resources.