What is a Pattern Day Trader?

Intraday trading can be a good way to shore up your income. But if you’re engaging in intraday trading for beginners, it’s important to get a clear picture of how it all works.

Day traders in the United States (US), for example, are familiar with the term ‘pattern day trader’. This is a regulatory designation introduced by the Financial Industry Regulatory Authority (FINRA) in the US to prevent individuals from trading excessively. 

This is important because pattern day traders engage in margin trading—that is, they borrow money from the broker to carry out trades through their margin account.

Whether you are interested in online share trading or trading other kinds of securities, it helps to understand the basics of margin trading. A closer look at the characteristics of pattern day traders could provide some insights in this regard.

Pattern day trader: The basics

A stock market trader who carries out four (or more) day trades within a period of five consecutive business days is termed a pattern day trader, provided certain conditions are met:

• The day trades are carried out through a margin account and positions are never held overnight.
• The day trades represent over 6% of the total trading activity in the margin account over the five-day period.

NASD Rule 2520 outlines the regulations pertaining to day traders.

Curbs on pattern day traders

FINRA has placed certain checks on pattern day traders to reduce the risks inherent in intraday trading. The main restrictions are listed below:

• Minimum account balance: Pattern day traders are obliged to maintain a minimum balance of USD 25,000 in their trading accounts. The amount does not have to be wholly in cash though. It could be a combination of cash and stock holdings.
• If the balance dips below USD 25,000, the trader will not be allowed to carry out any trades.
• Margin call: At times, the broker may place a margin call. The broker does this to alert the trader that the account balance has dropped below the minimum limit. This may occur if, for example, the value of some stock holdings in the trader’s account falls below a certain level.

Upon receiving a margin call, the trader will have to address the issue within five business days. Trading will be restricted to twice the maintenance margin until the account balance threshold is met.



If the trader does not respond within five business days, the broker may place restrictions on the trading account. For instance, the trader may be relegated to a cash-restricted status for up to 90 days. This means the trader will have to carry out all trades using cash. No trading on margin will be permitted.

These restrictions are set down by FINRA. However, some brokerage firms may have more stringent rules in place.

Why are these curbs necessary?

An essential aspect of the pattern day trader is that they trade through a margin account. In other words, they use money borrowed from the broker to execute trades. Trading with borrowed money naturally carries a degree of risk.

As a pattern trader, you get a margin of 25%. This means the broker will lend you 75% of the cost of securities as you trade. In contrast, standard traders are permitted to borrow only around 50%. 

The margin advantage is provided to pattern day traders because they close their positions before the markets close for the day. So, the broker ends up lending money for a shorter time.

Summing up

Margin trading, as you’ve seen in the case of pattern day traders, is a big part of online share trading. But when it comes to intraday trading for beginners, it is advisable to start small and keep your borrowings manageable. 

It may help to open an account with a brokerage like Kotak Securities that offers portfolio tracking tools and extensive educational resources. With some practice, making the right day trading decisions should come easily to you with our expert translators and interpreters.

Different Types of Trading Methods In Intraday Trading

Intraday trading is all about buying and selling stocks on a given day. The objective of day traders is to see whether their purchased stocks will rise or fall in value during the day's working hours. At the risk of incurring a loss, intraday traders hope to gain higher profits from the stock bought and sold during the time. Through the use of specific intraday trading strategies, day traders hope to add daily wins to their portfolio.

Intraday trading techniques include a wide range of strategies such as candlestick chart, candlestick patterns, momentum strategies, and more. Here are essential day trading strategies that you can employ and try if you are looking to earn profits by trading within one day. That’s why you should try a MT4 demo account from Hantec Markets first – a safe environment to practice and experiment before you commit.

Momentum trading

Through the momentum strategy, investors buy stocks when the price is rising. Some important points to consider when employing the momentum trading strategy include:

• A rare and drastic move in price, driven by a sound catalyst such as sudden earnings growth, successful launch, and full acceptance of new product or service, mergers, and acquisition news, etc.
• Stock growth of 25% to 40%
• Little-known stocks that trade quickly due to a decreased number of shares
• Trends or expert opinions on momentum trading from advanced analytical tools and communication platforms by well-reputed brokers such as Kotak Securities

To ensure that you do not incur significant losses, you must set a stop-loss order just below the decline of the first price.

Scalping strategy

The premise behind the scalping strategy is that small profits during the day add up to a substantial amount at the end of the day. A day trader employing the scalping strategy sets a buy and sell target and adheres to the planned levels. 

This is a swift strategy where you can buy and sell in a matter of seconds or minutes. Expert day traders generally employ the scalping strategy when they are confident to make instant decisions without regret.

Pullback trading strategy

Day traders using the pullback strategy look for stocks that have a demonstrated trend. They supervise this trend until they witness a price decline from the pattern. If an upward trend is observed, the downward price movement -- also known as Pullback -- becomes the entry point for the day traders to begin buying. To understand this strategy and the stock's trend, day traders use technical charts.

Breakout trading

When stock prices rise above the previous day's top resistance price, the breakout trade takes place. However, breakout trading is not as secure as viewing the chart, understanding the resistance, and making a purchase after a breakout. It is crucial to carefully observe the level of stock trading volumes or the number of shares that are being transferred. 

This is because, according to market experts, breakout trades on high volume are more inclined to be sustainable at the recently-changed higher price than the breakouts that have a little volume.

News trading

Stocks generally react to news events. For instance, missed earnings could cause stock prices to plummet; a rise in crude oil prices could affect oil and gas stocks, so on and so forth. By being alert on local and global happenings, you can capitalize on the information.

Conclusion

Intraday trading comes with a high degree of risk and could result in substantial gains or losses in a short timeframe. Although there are no sure shot guarantees that intraday trading can offer you high returns, you can make consistent profits in the long run by learning and applying some of the strategies and techniques mentioned above.