Day Trading

The Financial Industry Regulatory Authority (FINRA) has implemented strict requirements for accounts that actively day trade. To identify these accounts, FINRA has defined a Pattern Day Trader as someone who completes four or more day trades in a rolling five business days.

What is a day trade?

Day trading is buying and selling or selling short and buying to cover the same security on the same day (including pre- and post-market) in a margin account except for:

• A long security position held overnight and sold the next day prior to any new purchase of the same security, or
• A short security position held overnight and purchased the next day prior to any new sale of the same security.

How are day trades counted?

Any opening transaction closed out in part or in full in the same day is counted as a day trade. This includes option transactions. Partial executions are not counted as multiple trades on the opening or closing side. However, if part of your order fills, and then you modify it and the rest fills, that may be counted as two day trades.

Example 1

Order 1: Buy 100 XYZ
Order 2: Sell 50 XYZ
Order 3: Sell 50 XYZ

This is one day trade. Day trades are counted based on the opening transaction and whether that opening transaction was closed out in the same day. In this case, it was. Even though you sold your 100 shares of XYZ in two separate transactions, it still counts as one day trade because one single opening transaction was closed out.

Example 2

Order 1: Buy 50 XYZ
Order 2: Buy 50 XYZ
Order 3: Sell 100 XYZ

This is two day trades. Here, we have two opening transactions closed by a single sell order. The first group of 50 shares of XYZ was bought and sold in the same day, and a second group of 50 shares was also bought and sold in the same day.

Example 3

Order 1: Buy 50 XYZ
Order 2: Buy 50 XYZ
Order 3: Sell 51 XYZ

This is also two day trades. All 50 shares from the first opening transaction were bought and sold in the same day. One share from the second opening transaction was bought and sold in the same day. Even though only one share from Order 2 was sold, the purchase and sale of that single share in a single trading day counts as a day trade.

Example 4

Order 1: Sell short 100 XYZ
Order 2: Buy to cover 50 XYZ
Order 3: Buy to cover 50 XYZ

This is one day trade. With short selling, your opening transaction is a sell order where you commit to buying the shares back. If you open with a short sale of 100 shares of XYZ, you could buy back those shares in two transactions or twenty and it would still count as only one day trade because only one opening transaction was closed.

Example 5

Order 1: Sell short 50 XYZ
Order 2: Sell short 50 XYZ
Order 3: Buy to cover 100 XYZ

This is two day trades. You have two opening transactions, each a short sale of 50 shares of XYZ. Both transactions are closed out in the same day, so it counts as two day trades, even though you closed them with only one transaction.

Example 6

Order 1: Sell short 50 XYZ
Order 2: Sell short 50 XYZ
Order 3: Buy to cover 51 XYZ

This is two day trades. The first is the short sale and purchase of 50 shares of XYZ, and the second is the short sale and purchase of one share of XYZ. Much like Example 3 above, even the opening and closing of one share counts as a day trade.

Example 7

Order 1: Buy 2 XYZ
Order 2: Buy 5 XYZ
Order 3: Buy 50 XYZ
Order 4: Sell 50 XYZ

This is three day trades. We pair the closing transaction with the opening orders during that trading day, beginning with the earliest time of execution. This means you closed out all of opening Order 1, all of opening Order 2 and part of opening Order 3, resulting in three day trades.