Last week a subscriber wrote and mentioned that he was getting in and out of trades more quickly than he had in the past and had even entered and exited the same position in the same day. That action resulted in a warning from his broker about day trading. Though I certainly do not consider myself to be a day trader, I do enter and exit positions at least occasionally on the same day, I am aware of the day trading requirements established by the NASD and by my own brokerage firms.

"The following general requirements regarding day-trading have been imposed by the NASD:

Pattern Day-Traders are characterized by transacting four or more stock or options day-trades within a five-day period in a margin account.

Pattern Day-Traders must maintain at least $25,000.00 in account value in order to continue day-trading practices.

In the event that a Pattern Day-Trader does not maintain $25,000.00 in account value they will be required to provide cash-on-hand for same-day stock transactions.

Additionally, an account may be flagged for day-trading if it regularly recycles funds within the same day, for example, an investor sells a security (stock or option) for a premium of $400 and proceeds to purchase another security (stock or option) for $400 when no other capital is available and prior to funds being cleared.

If an account becomes designated as a pattern day-trading account and does not maintain the minimum required equity, at least $25,000.00, a call will be issued which must be met within 5 business days, otherwise the account will be restricted to Cash only for a period of 90 days or until the account equity is brought above the minimum equity requirement or at least $25,000.00."

The NASD Day-Trading Risk Disclosure Statement also sets out some considerations for the potential day trader (one who uses an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both the purchase and sale of the same security or securities). Undoubtedly one should consider these as serious warnings.

Among the points made by the NASD, are that day trading can be extremely risky and is not appropriate for someone who has limited resources and/or limited trading experience. The trader should be prepared to lose everything used for day trading. They also indicate that "certain evidence" indicates that an investment of less than $50,000 will significantly impair the day traders ability to make a profit.

As if that isn't enough, the NASD also points out that day trading on margin could result in losses beyond the initial investment. Multiple commissions, of course, add to the difficulty in attaining profits.

I am not a great fan of day trading since so many have lost so much through the practice. I am on board with the NASD's advice to be cautious of claims of large profits from day trading. Certainly, some have made fortunes day trading, and for that reason it can be tempting. Many more, however, have been losers so heed the cautions and do your homework before considering the strategy. Even after achieving an understanding of the significant risks, the prospective day trader needs to understand his own trading emotions very well and be able to attain great discipline before putting any money at risk.

Good Trading!
Bill Kraft

December 8, 2007

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