Pattern Day Trading is for a stock market trader who executes four or more day trades in five business days in a Margin account. This rule was created by FINRA (financial industry regulatory authority) to protect the beginner traders. (So they say) In order to have a pattern day trading status you need to have $25,000 in your account at all times, as long as you decide to make four or more day trades in five business day.
Active traders who have $25,000 in their brokerage account can apply for a day trading account. Day Trading accounts your U.S broker will provide you with 4:1 leverage and that is only for a trader who has an account with $25,000 or more.
In a regular margin account your U.S broker will offer you 2:1 leverage. For example if you funded your account with $500 and you applied for a margin account, you will then have an additional $500 bringing your total purchasing power to $1,000. With leverage comes responsibility. You can lose more than your initial balance and some of your broker’s margin, which will cause a “margin call” You will be required to fund your account to the “margin call balance” deemed by your broker. With a margin account you are able to short sell stocks. You can not short sell a stock in a cash account.
In a cash account the pattern day trader rule does not apply. Cash accounts, with a buy or sell transaction with stocks there is a 3 day settlement. As in your funds are tied up (assuming you used all your cash to either buy or sell a stock) You will simply have to wait until the funds settle. Cash account traders will limit their trades to a very few due to the cash settlement standards.
Typically traders who have a margin account with funds under $25,000 are generally the ones who often get in trouble for making four or more trades in a three day rolling period. Your broker calls this “free riding” you are trading on unsettled cash even if you have a margin account but not enough to clear you of the pattern day trader status. There is a penalty if warned more than twice, such as freezing (locking your account) for 90 Days.
How to get around the PDT (pattern day trader law)
There are a few ways around this rule, if you do not have the $25,000 in your account. One way is to Swing trade.
1.) Swing Trading is not day trading, you will be taking advantage of time and allowing the trade to work out based on analysis and trend. You can make a few swing trades in your account without over trading. Swing trades generally takes 1-3 days or up to a few weeks to work out.
2.) You can open multiple brokerage accounts. The only thing you will have to keep track of the trades taken in each account. Remember no more than 4 trades in a 3 day rolling period per account.
4.) Open up an overseas brokerage account. The very last step on this list. The U.S markets are governed by the S.E.C and the brokerage accounts are protected by SIPC (Securities Investors Protection Corporation) up to $500,000. Do your due diligence on an overseas broker, if you decide to go that route.
Just know that small accounts have the potential to develop into large accounts. The Profit Room have done numerous small account challenges. We took $1,000 in forex and grew it into 6 figures. As well as our swing trading account challenge. It’s just a matter of the proper education/mentorship.
I’d like to share with you a frequently overlooked source of profits from your trading. It’s a simple concept yet so very important if you expect to be able to continue trading for any length of time! The concept is that of controlling both the number of losses you have and the dollar amount of those losses. I realize that statement sounds so obvious that you might be tempted to put this article away in favor of a night of Netflix, but please stick with me here. I’ll share some things with you that you probably don’t expect to find here!
To better visualize the concept I’m describing, picture a large washtub, the kind you probably remember from your childhood. Now imagine the difficulty of filling the washtub if it has several ‘six-inch’ holes in the bottom! No matter HOW MANY garden hoses you have filling it up, the water is running out faster than it’s going in!! Now imagine plugging each of the holes, one at a time. Plug the first one and the difference is almost imperceptible. Plug the second hole and you begin to notice that there is less water splashing on the ground. Plug the third and you actually may see the water level in the tub begin to rise … just slightly, perhaps, but rise nonetheless! Plug ALL the holes but one and the difference becomes measurable! Now that you’re down to one hole, let’s begin to repair it a piece at a time. First we cover HALF the hole … while the tub still leaks, you can now tell there’s more water going INTO the tub than running out the bottom. Patch half the remaining leak and you begin to adapt to the idea that it’s OKAY if a little water comes out, just as long as there’s more going in than coming out!
Our trading accounts are something like that. Most new traders have HUGE trading account “holes” and the money is draining out faster than they can replace it! No matter how profitable they are on some of their trades, they just seem to give it all BACK! If we’re smart about our trading when we notice that, we’ll STOP trading until we find the challenge and FIX it! What I’m describing are the DIRECT results of FOCUSING on the profits and almost totally forgetting about controlling the losses. There are many reasons for that but despite the reason, the results are the same. Left unchecked, such a situation will take us totally out of the trading business in a very short period of time! Does this describe you and your trading account? Would you like to know how to ‘FIX’ it? Let me share with you four RULES for trading which directly address losses and if followed, can ‘plug’ many of your profit leaks!
RULE 1. Wait for the stock to CONFIRM the anticipated direction before entering the trade
This rule can decrease the NUMBER of losses you experience. As simple as that sounds, it’s one of the most often violated principles of good trading habits. So often is this rule broken that we are all familiar with cute little descriptions such as “catching a falling knife.” What you use for this confirmation is your own affair; price rise or fall, momentum, frequency of trades or bid / ask “size” are just a few ways. Personally I combine them all (more or less), developing a ‘feeling’ about the confirmation, rather than a measurable quantity. However you choose to define confirmation, let experience be your best teacher here and do NOT enter the trade until you’re convinced the stock is moving your direction!
RULE 2. When you are filled on the entry, place a STOP loss to minimize your potential for loss.
This rule controls the AMOUNT you can lose on any one trade. I like to use about 1/2 of the stock daily movement for my stop loss amount. For example, if a stock price moves on average, say $1 every trading day, then I’ll back off 1/2 of that, or 50 cents and place my stop loss there, limiting the losses possibly incurred on that trade. Whatever you use, be FAITHFUL in adhering to the protection afforded by the stop. In other words, DON’T CHANGE IT. If you’re stopped, you’re stopped. He who trades and runs away lives to trade another day!
So much for minimizing the NUMBER and dollar amount of losses. Equally important is allowing your profits to maximize AT THE SAME TIME! Here’s how to do that.
RULE 3. When you become profitable in a trade, replace the stop loss with a TRAILING stop, trailing by that amount of profit.
Say you’re up 25 cents in a trade and you have your stop loss in at 50 cents below your entry (on long positions). Replace the stop loss with a 25 cent trailing stop. At THIS point, you’re WORST CASE outcome for the trade is BREAKEVEN (give or take a couple of pennies)!!! You have virtually NOTHING to lose and EVERYTHING to gain from that point on!
RULE 4. Leave the trade alone from this point on!
The market overall will do a much better job of managing the trade (with the above rules observed) than you or I EVER could! Once you’ve reached the MAGIC POINT in your trade, just go away and do something else. Your trade is on autopilot!
When stock prices start to move within a certain range, falling to established lows and then rebounding up to established highs and fall back again, the stocks are said to be in a consolidation or congested phase.
Most of the time, typical consolidation patterns can be seen, with the most common one being the rectangle pattern or sometimes called a channel.
When prices start to drop, traders get nervous and weak holders will sell their stocks so that they will fall to a support level which other traders will consider a good price to buy. From that level, stock prices will then rebound, often with volume as support comes into the stock.
As the price of the stock improves and increases, it will reach a peak where traders who have purchased the stock at lower prices will sell. At the same time, weak holders who have purchased the stock at higher prices may wish to bail out as their losses are narrowed with the improved prices. At that point in time, resistance is encountered and the stock price then tops over to form a peak.
When you connect the support prices and the peak prices where the price tops over, you will find the pattern of a channel or a rectangle.
During consolidation phases, prices trade within a range formed by the bottom of the channel or rectangle and the top of the rectangle or channel.
The key is to identify the bottom of the channel and to buy closer to the bottom of the channel and to sell as prices reaches the top of the channel or rectangle.
A common mistake newer traders commit is to continue to use their trend following trading system during a congested phase and encounter a lot of whipsaws as prices oscillate between a small range.
When you transit from a bullish market and moves into a bearish market, be contented with smaller gains which come from trading the congested and consolidation phases. Fall back upon the support & resistance areas to track your stock prices and trade them in relation to their location within the price rectangle pattern that you can easily identify in your stock chart.
If you know the pitfalls of trading you can easily avoid them. Small mistakes are inevitable, such as entering the wrong stock symbol or incorrectly setting a buy level. But these are forgivable, and, with luck, even profitable. What you have to avoid, however, are the mistakes due to bad judgment rather than simple errors. These are the “deadly” mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.
Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once you’re already off the road.
Although trading involves risk, never treat it like gambling. You must have a solid trading strategy, one which you plan, test, and revise repeatedly. You need to stick to this strategy, and never act on spur-of-the-moment decisions. All you do when you act on a gut feeling is jeopardize any and all of the thoughtful planning you’ve done by giving yourself completely over to chance. Remember that you can never control where a single trade will end up, but you do have control over a long-term plan.
And don’t evaluate your performance on the basis of individual trades. A gambler might think that a small loss is a failure while one huge risky gain means success. Traders should never think this way. Instead, judge yourself by the consistency and profitability of your overall strategy. This is the only way to stay in control of your trading success.
To do this, of course, you have to build a solid strategy. This means developing a set of pre-defined rules that you follow consistently. You should set goals for each week, or possibly each month (but never for a single day, as there are too many things you won’t be able to control over such a short period of time). Next, decide on realistic profits and losses for each trade. Then, according to these markers you’ve set for yourself, carry out your plan without exceptions.
If your set profit for a trade is, say, $300, sell when you reach that milestone, even if you have a feeling the stock will rise. Otherwise, you corrupt your plan with too much risk, and you’ll never know if your overall strategy was successful or not. You may have gotten lucky with one trade, but you haven’t determined any kind of consistency.
Keeping to a strategy will allow you to revise what you’re doing, learning which goals and limits will work and which won’t. Straying from your strategy teaches you nothing useful that you can apply over the course of your trading career. So, while you may gain a few hundred, or even thousands, of dollars on a single trade, who knows how much knowledge you sacrificed, knowledge could have gained you tens or even hundreds of thousands of dollars in the years to come.
Stock trading has numerous benefits as a viable part time occupation.
In contrast to a second job, there are no special qualifications to begin. The stock market doesn’t care about your level of success, education, ethnic origin or any personal characteristics. Complex employers, office politics or difficult employees do not play a part in trading. Additionally you have the freedom to trade from any location. If you follow a few simple rules you can run your business on your own terms.
The most important factor is to be clear about why you want to trade stocks. What do you hope to gain financially from learning to trade?
Are you looking to:
1. Create an enhanced lifestyle with supplemental income?
2. Replace a full time income with a passive income stream?
3. Become independently wealthy by creating a financial base independent of other income sources?
What would being a successful trader mean you? Imagine yourself making successful trades and gaining financially. Think about what it would feel like to have extra money in your bank account and to achieve your targets. With a clear picture of what you want and how that would feel you will be able to remain focused and motivated.
Your first task.
Your first task is to put one primary goal for your trading plan in writing. Additional goals you set can then support your primary plan.
As well as learning to trade stocks it is essential that you understand yow you react under stress. Being aware of your own behavior patterns and common causes of and reactions to stress when trading will help you to master stock trading.
The reason that many people lose money in the stock market is because they lack the proper knowledge base. Independent of trading styles there is one thing common to all successful traders; the use of a tested and proven system.
In learning to trade you must be willing to let go of pre-formulated ideas and start fresh, develop new successful habits, and the discipline necessary to trade successfully over time.
Are you willing to do this?
Successful stock market trading eludes many people because they don’t have contact with an experienced, successful trader or trading system that actually works. Going it alone can be potentially expensive when learning by trial and error. Investing in a solid education and taking advantage of the insights and experience of successful trader makes a lot of sense when learning to trade successfully.
Why is it that some people are successful in trading the markets? And why is it some people fail? Is it luck that determines if you are successful or not in making money from the market? Is it the system or strategy that a person use which determines their success?
A lot would say that it is the system or strategy that they employ which ultimately determines if they come out winning from the market.
Every system that exists on the internet will show you how to make money using it. Without a doubt, it will make money for you. The question is usually how much money will the system make for you. All the systems that are out there will show to you how their system has worked base on historical data or activity and then at the bottom of the page there would be a disclaimer clause that states ‘.. Historical data does not determine or guarantee future earnings….’
So why is it that these sites or page include this disclaimer clause?
The disclaimer clause is incorporated in it because they know that there are certain elements which they can not control. Human emotions.
Human emotions are always the key to either success or failure in any business. And it is no difference when trading the markets. Read all the books about trading that you want, buy all the successful system that you want. If you can’t control your emotions, you can’t succeed in the markets.
That’s the reason for the disclaimers clause because the one thing that the author can not control is their subscribers or customers emotions.
In the market there are but only two main emotions that every trader will experience; GREED and FEAR. When this emotion appears it is not how we eliminate it but rather how we act on it. There are natural emotions that can not be eliminated. This emotions forces us to action, thus how we act on it will determine the outcome.
Like anger, when we are angry at someone, it’s either we say something nasty or we can just kick a bucket or we can just dive into a pool of water. Which ever action that we take, it produces a different outcome or result.
All too often when we begin to see two to three consecutive loses on our trading activities, we would begin to have doubt. When this happens we are already at the state of fear, we fear losing more of our money and thus begin to doubt that the system is working.
While no system is absolute, meaning no system will guarantee that you will make money ALL the time. The system seller would say that we would be able to make money consistently, provided we follow their system to the dot.
On the other hand, when we begin to see two or three consecutive we begin to feel on top of the world. We begin to feel that we can start making good money from the market and then start tweaking the system or maybe putting more money in the market to leverage our earnings or maybe begin to take on more positions, which ultimately make us deviate from the system which we were using. This is when greed has already stepped in to rule our thoughts.
There is saying ‘The system is only as good as the person using it’. So if we don’t follow the system either with we are making loses or when we are creating profits. We would ultimately fail. And to follow the system requires discipline. The discipline to act on our fear and greed when it sets in, will determine how well we do in the market.
Once again discipline is the key. We must have the discipline to say ‘I have reached my target. I should take profits now even though it may go higher’ when greed sets in. And when fear sets in one should say ‘I have to take a position even though the market does not seem to be moving in my favor’
While these are but two circumstances when greed and fears arises, there are, and will be many instances when we need to make a decision to either enter or exit the market. And these are very two most important decisions to take in order to succeed in the markets. The discipline to follow the system diligently no matter what happens to the market
So no matter how good the system is, the only and sure way is to lasting success in the market depend on the discipline to overcome our personal emotional to follow a particular system religiously.
The Profit Room
As we all know, when we open a trade, we look forward to it being a winner. Given the win rate of a certain trading strategy, there is a random distribution between wins and losses. However, we trade to make money with a proven strategy. The Profit Room’s strategy allows you to be confident when you place a trade. So we don’t “panic close” the trade when the market goes against us, or exit too soon when we are in profit.
If you know the expectancy of your trading strategy, you will be able to deal with these situations better. There is a psychological aspect here: knowing the predictable profitability of a larger number of trades you undertake will build your confidence, which in turn reduces your tendency to shortcut winners and to let losers run too long. Having this confidence will thereby improve your overall results.
How to determine the expectancy of your trading system? Assuming you keep records of your trades, you should go back and look at all your trades that were profitable versus all your losing trades. Do this over a period of at least 3 months and at least 100 trades. The more data you can use, the more accurate the result. We only need 4 pieces of information: number of winning trades, number of losing trades, amount of money won and amount of money lost. From this data we can calculate the following:
Net profit = amount of money won – amount of money lost
Win rate = number of winning trades / total number of trades
Lose rate = 1 – win rate
Average winner = amount of money won / total number of winners
Average loser = amount of money lost / total number of losers
Average reward / risk = average winner / average loser
Expectancy per trade = win rate x average winner – lose rate x average loser
Or, alternatively, expectancy per trade = net profit / total # trades
Expectancy per month (profit forecast) = expectancy per trade x average # trades per month
Expectancy per amount of money risked = win rate x (average reward / risk + 1) – 1
Or, alternatively, expectancy per amount of money risked = net profit / average loser / total # trades
We hope this information helps you in determining your expectancy rate of trading.
The Profit Room