If you have dreams of becoming a millionaire buying and selling stocks, pump the brakes for just a minute. The SEC has defined some rules that may prevent you from going balls out. The SEC defines someone as a Pattern Day Trader if they make more than 4 round-trip trades within a one week period
A round-trip trade is buying then selling a stock.
For an individual to make more than 4 round-trips trades in any given week, they must have $25,000 in their account. For those of us with less than $25,000, we are limited to just 3 round-trip trades per week.
That really puts a hamper of anyone who wants to trade like the big boys. Most traders that I follow on Twitter and in the chat rooms normally make more than 4 round trip trades in a single day. No one likes this rule but its there to protect idiots from losing their life savings on a few bad trades.
For someone to get around this rule, they simply need to open multiple accounts with different brokers. For example, if someone had an E*Trade, SureTrader and an Interactive Brokers account, in theory they would be able to make up to 9 trades per day. That should be enough for someone starting out.
In fact, I’ve heard it’s best to spread your money around between brokers if you’re planning on shorting stocks. Not all brokers will have stocks to short every time you need them. With multiple brokers at your disposal, the odds of finding shares to short greatly increases.
Here are some examples of a round-trip trade.
Say you purchase a single companies stock 3 times in one day. If you sell the same stock you purchased all at once, it’s considered a single round-trip. Same thing in reverse. If you purchase a single companies stock, then sell it 3 different times throughout the day, its still considered a single round-trip.
Every broker is different so you’ll need to contact them to find out how they define round-trips if you notice your account has been flagged for over trading. What are your thoughts on trading with an account under $25,000?