- Daytrading
is the buying and selling of the same stock in the same day.
The ideal daytrader is flat at the end of the day, meaning all
stocks he purchased were sold and all stocks he sold short were
covered before the end of the day, so he does not hold any stock
overnight. The main reason for this is the degree of control
a trader has when the market is open compared to absolutely no
control when the market is closed. If a company loses half its
value overnight and you own it, half your investment is gone!
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- The New Rules
- As some of you might be aware, the NASD
has come out with some new margin rules for daytrading accounts
effective September 28th, 2001. Among these rules is the requirement
for all pattern daytrading accounts to have a minimum equity
of $25,000. Currently, all accounts are classified as investment
accounts until a pattern daytrading account status is triggered.
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- What is a pattern daytrading
account?
- A "pattern daytrading account"
is classified as an account that has four or more daytrades in
a consecutive five day period. A daytrade is a buy and sell of
the same security in the same trading day. There is no limit
on other types of trades. For example, you could buy 10 stocks
today and sell those 10 stocks tomorrow. Because you held them
overnight they are not considered daytrades. Once an account
is determined to be a pattern daytrading account, it will forever
be classified as that and will have specific guidelines it must
follow.
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- What happens if I do 4
or more daytrades in 5 days?
- Investment accounts that do 4 or more
daytrades in a 5 day period will be considered pattern daytrading
accounts and will be required to bring the account up to $25,000
in equity. Those accounts will have three days to do this. If
the account has not been brought up to the minimum equity of
$25,000 after three days, the account will be considered frozen
and limited to liquidating transactions only.
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- Where can I find the rules?
- The NASD web site has the complete listing
of the new rules.
- http://www.nasdaq.com
- http://www.nasdr.com/filings/rf00_03.htm
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- Why was the change made?
- We can only speculate. On the surface,
it looks like it the new rules were created to protect people
that trade with less than $25,000 from daytrading because daytrading
is "considered dangerous" to their capital. Our experience
is that investors that held stocks overnight lost the largest
amount of money in the past year. So, why pass a rule to restrict
daytrading? Just think what would happen if everyone daytraded
and went flat at the end of the day! Time will tell what the
effects of the rule will be, but I believe it will cause more
people with less than $25,000 to hold overnight. That is a large
number of people that will be exposed to the added risk of holding
overnight. I think it will increase intraday volitility because
of the 4 to 1 margin and cause larger moves at the close of the
market. 4 to 1 margin is a benefit to those that trade well,
but those that trade poorly will lose their money faster if they
use the larger margin.
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- The new margin
- In the past, if you had a margin account,
you had 2 to 1 buying power. The new rule gives traders 4 to
1 buying power, but only for intraday trading. If you are going
to hold overnight, you must liquidate enough stock to be at 2
to 1. Our belief is that you should not use margin to hold overnight
unless you are an experienced trader and really know how to use
the leverage of margin. Holding overnight using margin is what
caused so many people to lose all their money during the bear
market. It is greed that causes traders to do that. Try to make
a reasonable profit on a trade with minimum risk.
-
- At Princeton we are updating our TradeTutor training courses
to include information about this new rule as well as the new
features of Realtick software. We will be offering a free introductory
CD with 4 actual lessons from the TradeTutor. Look for it on
our web site and in the next newsletter.
- If you notice an error in our newsletter, we would
appreciate your letting us know with an email
- One of our new traders exclaimed - trading without level 2 is
like trading with a blindfold on. How true that is! And having
level 2 can work against you unless you know how to use it effectively.
Our training is, so
good that we have had people fly
into San Diego from Ohio, Pennsylvania, Texas and even from London,
England. So, rather than losing money on that next lousy trade,
invest it in your education at Princeton Daytrading
where you can develop your skills as you learn in the most effective
and easiest way. Remember, your money is counting on you!!!
- Education is
the key to success in any endeavor
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