New to trading? Small account? You MUST read my novice trader tip series!
As I have mentioned in previous posts I am still a relatively new stock trader and I only started trading 18 months ago by following this guy’s strategy and alerts click here . Please see my review of his excellent strategy here.
My learning curve has been steep over this last year, I have been very profitable and I would like to give back as best I can. My plan is to share ten top tips that will help new traders make more money, more easily and not have to learn them the hard way!
I am going to post an important tip regularly over the next several weeks which will hopefully help beginning traders become more profitable faster!
Tip #1: Pattern Day Trader (PDT) and common margin call pitfalls.
Pattern Day Trader (PDT) rule: This one took me a couple of margin calls to finally understand and get straight! The basic idea is that the SEC considers any trader who executes 4 or more day trades in a margin account within 4 business days to be a pattern day trader. But what constitutes as one day trade? And why would we care? If your equity balance in a margin account falls below $25,000 and you are a classified as a pattern day trader you will receive a margin call! This rather irritating process involves your account being frozen until you deposit the required funds to bring the account back up over the minimum equity! This can result in you missing valuable opportunities in the market and even lead to having your account frozen for 3 months.
How to avoid being classified as a pattern day trader
If there is one thing to take away from this post it is this: Day trades are counted on the SELL side. This might sound simple but it has significant implications. For example if you buy stock XYZ and then sell your whole position in quarters over the same day you will be immediately be classified as a pattern day trader! This means you cannot let your account balance fall below $25,000 or risk a margin call. However, you are allowed to buy a stock as many times as you like in a single day and your account will not be classed as a PDT account as long as you do not sell that stock more than 4 times that day (assuming you have not made any other day trades during the last 4 business days).
Two different ways to meet a margin call
So what happens if you are classified by your clearing firm as a pattern day trading account and the account equity falls below $25,000? You receive a margin call (your account buying power goes to zero!) for the amount required to bring the equity over $25,000 which you can meet in two different ways. First, you can simply deposit the required cash into the account and you are done. However, the second way is that you can sell some stock to bring your account over the $25,000.
HOWEVER, please note that my broker did not inform me that you can only meet a margin call in this way three times! Each time you meet a margin call by selling stock you get a ‘strike’ against the account. If on the fourth margin call you sell stock to meet the call your account will be frozen for 3 months. Nothing you can do at that point will unfreeze your account.
I hope this information helps some people with accounts around the $25,000 region survive and utilize margin safely.
Good luck trading!