Pattern day trading is a method of trading that involves making four trades in a matter of five days. In comparison, day trading is buying and selling the same asset in a margin account on the same day. Many different strategies are implemented in the trading world, whether long-term, short-term, or daily trades.
What is a pattern day trader and a day trader?
A pattern day trader makes four trades or more within five business days. A day trader, on the other hand, is defined as one who buys and sells the same asset in a margin account. A margin account is an account with available credit that can be used to buy securities. Brokers typically prohibit day trading in non-margin accounts.
Let’s give a practical example of the two strategies to understand them better. A day trader buys ten trades of ABC in the morning and ends up selling them later in the day. If the same trader makes four or more-day trades in five days, he’d be considered a pattern day trader.
Pattern day trading, in most cases, is for traders eager to profit from small price shifts. They aim to use margin to increase their chances of gains compared to assets. Pattern day trading is when a trader makes frequent daily transactions with stocks, options, or other securities. Like any trading strategy, pattern day trading comes with various risks. Therefore there are pattern day trader rules.
The Difference:
Pattern day traders and other investors have many differences. The main difference between the two is their strategy to profit in addition to the risks they’re ready to take. The main focus of day traders is short-term. They are looking to make money by buying and selling stocks quickly during their most volatile state. Other investors are long-term focused, such as buy-and-hold investors who buy stocks and hope they will increase in value over time.
Day traders will buy and sell trades frequently, while other investors will take more time selling their assets. Day traders must have a margin account, while other investors are not obligated to have one. The account balance for a day trader must be $25,000 minimum, while for other investors, the broker can often set a minimum account balance of $0.
Pros and Cons:
Before you decide whether pattern day trading is for you, let’s discuss the pros and cons. Pattern Day trading offers potentially high profits. Since these trades are made fast, it requires a short-term outlook, meaning there’s no need to assume how the asset will perform in a year or month. As we mentioned above, a margin is necessary with day trading, which can help increase potential gains in the process. The disadvantage of day trading is that margin requirements can also increase potential losses. In addition, this method of trading can be more time-consuming than long-term investing. Day traders spend the whole day following the market and trying to find the best times to buy and sell.
Conclusion:
Pattern day trading is high-risk but brings back profits for many investors. Many investors have taken on day trading as a profession. Day trading is not a practical option for an individual investor because it is also highly time-consuming, along with the risks it brings. Most investors looking to build their portfolios for long-term goals like retirement will benefit more from a passive investing strategy that involves holding a diversified portfolio of stocks, bonds, and other securities for a more extended period.
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