One of the most crucial questions a new trader can ask themselves is, “What is day trading. “ This question not only directly relates to how much enjoyment is derived from your new trading endeavor but is critical for success.

Many traders do not understand the difference between short term trading, pattern day trading and just day trading. This article will explain the differences.

Day trading is defined as any trade that is opened and closed during the same trading session. If you hold overnight, it is no longer a day trade.  Holding times up to 3 days are considered short term trades. If you hold longer than 3 trading sessions, the trade falls into the swing trading category.

Pattern day trading is simply making 4 or more trades within a five business day period. The official SEC definition reads like this:

FINRA rules define a “pattern day trader” as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period. This rule represents a minimum requirement, and some broker-dealers use a slightly broader definition in determining whether a customer qualifies as a “pattern day trader.”  Customers should contact their brokerage firms to determine whether their trading activities will cause them to be designated as pattern day traders.

A broker-dealer may also designate a customer as a “pattern day trader” if it “knows or has a reasonable basis to believe” that a customer will engage in pattern day trading.  For example, if a customer’s broker-dealer provided day trading training to such customer before opening the account, the broker-dealer could designate that customer as a “pattern day trader.”

Under FINRA rules, customers who are deemed “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts. For more information on pattern day traders and related FINRA margin rules

Remember to avoid becoming a pattern day trader unless you have over $25,000 in your trading account.