There are lots of different ways to day trade. Today we’re going to focus on pattern day trading and one way you can leverage those margins. A pattern day trader is a trader who makes more than three stock trades in any five-day business period. Many brokerages firms will apply additional restrictions on accounts marked as pattern day traders. These restrictions will usually be affected by the amount of account equity you have. The number of shares or orders placed sometimes complicates the definition of a pattern day trader.
Most times if you can maintain a balance of $25,000.00 in your account you’ll be able to day trade as much as you want. If you can keep at least that amount in your account, there are usually additional benefits including access to margins and as a result of that, increased leverage.
Pattern day trade accounts typically have up to twice the industry standard margins. This is commonly referred to as buying power. The amount of buying power is set at the start of the day. When day trading, the buying power is usually four times the cash value.
You have to watch out though, buying power is only available when day trading. If you don’t get out of the stock by the time the markets close, they are not day trades. In that situation, you would have to pay in the overnight 50% margin requirement of the stock’s value. If you don’t meet the margin the brokerage could liquidate your account holdings in order to comply with margin rules. Day trading buying power sounds simple enough, but even highly experienced, long-term day traders have fallen victim and woken up the next day to find a not so pleasant surprise waiting for them when they checked their positions.
Margins and leverage are tools that you can, and should, use, but they have to be used intelligently. If you choose to day trade with day trading buying power, you can lose in excess of the initial investment..
Learn everything you need to know about day trading, margins, leverage, and pattern day trading at Warrior Trading. Are you a pattern day trader or have you ever used day trading buying power? We’d love to hear your thoughts on the best ways to effectively use these available tools in our comment section below. Happy trading.