Is Day Trading Legal? Day Trading Rules and Limitations
Day trading is a process by which people buy and sell securities within the same day. Most people might wonder if day trading is legal or its rules. In the United States, day trading is subject to rules that govern the minimum amount to trade and other issues. In this article, we tell you all the nuances regarding the day trading rules and limitations.
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Day traders usually take advantage of small price moves, which happen quickly. The legality of day trading is both strict and complex and is determined by local laws in each jurisdiction where it takes place.
There are a few limitations on how much you can trade in most countries and with whom. However, it greatly varies depending on the securities you are interested in trading. One of the main reasons day trading is considered unethical is because it can negatively impact your life or business long-term. Day trading is also limited to keeping the stock market controlled by a few individuals or large companies.
Day Trading - Pros and Cons
Day trading comes with its own set of opportunities and risks, including:
Pros
Day trading allows you to start making money immediately. You don't need to wait for long before your investment starts to pay off. You also don’t require any educational experience, so you won't have to worry about student debts or a lack of work experience. Lastly, there's no age limit and you don’t require a significant amount of money to start.
Cons
Unfortunately, day trading is quite fast-paced which means if you lose, your capital also disappears right away. One mistake can make the entire process more difficult with a complete investment loss. Due to this, people also need to have a good idea about the financial market and how it works. The day trading market is also very dynamic, and users need to be prepared to enter and exit a particular trade at any given time.
Is Day Trading Legal?
Yes, day trading is legal in the United States. The security laws only require that a brokerage firm or a representative receive an agreement from its clients to disclose their potential risks before putting them into day trading strategies and investments. However, most brokers and dealers do require registration and licensing.
Day trading can be risky and very volatile, and it also comes alongside many restrictions as it is difficult to distinguish between legitimate trading strategies and illegal manipulation. In addition, income earned through day trading also counts as a part of a person's income and is taxed accordingly. So, you need to be aware of taxes.
The majority of states consider day trading illegal if you do not have a license for this type of activity. There are no such restrictions in other markets (futures, cryptocurrencies, forex). So if you want to trade stocks, we recommend researching other markets beforehand.
SEC Day Trading Tips
The U.S. Securities and Exchange Commission (SEC) discourages day trading because it says the practice is risky for novice traders. Here are four essential day trading rules and tips to follow if you plan to trade stocks daily.
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Start with small positions: The SEC suggests you start with small positions when day trading to avoid getting in over your head. It is easier to add on if the trade goes your way, and it's also less risky.
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Start with stocks that are easy to handle: Newbie day traders should avoid using more sophisticated investments like options or futures when they first start. Instead, they want to limit their trading to keep it manageable.
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Set clear goals for your investments: Day traders should set clear expectations on how they want their trades to work out before making any transactions. Only use the money they can afford to lose, and traders should stay in their comfort zone regarding how much they are willing to risk on any given trade.
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Limit your day trading activities: To keep things simple for beginning day traders, the SEC suggests limiting the number of investments you make each day. You should set a goal for yourself of how many trades you will make and stick with it.
What is Pattern Day Trading Status?
Day trading can be a risky business. To mitigate some of these risks, many exchanges have implemented rules which restrict what accounts can and cannot do. The most restrictive of these is called Pattern Day Trading.
Pattern Day Trading was introduced by the NASDAQ, New York Stock Exchange (NYSE), and The Pacific Exchange (PCX). According to them, Pattern Day Trading status is imposed on any account that attempts four or more "consecutive day trades" within five business days.
Consecutive day trades mean that a trader's account has four or more trading days where the trader buys and sells stocks on the same trading day.
A trader's account will be immediately changed to Pattern Day Trading status if they attempt more than four consecutive days of day trading. Once under Pattern Day Trading status, many restrictions are placed on an account's ability to trade. For example, it includes accounts limited to four-day trades per day.
How to Remove Pattern Day Trading Status
There are three main ways to remove the pattern day trading designation.
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Bank liquidation: You must first open a new account with another brokerage firm and then liquidate the old account through this method.
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Bank transfer: In this case, one must simply contact their current broker and request a transfer to a broker without the pattern day trading designation.
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Net equity method: This method requires that one deposit at least $25,000 into their account and maintain it there for sixty days before requesting a transfer or getting liquidated.
What is Suspended Trading
Suspended trading refers to the temporary halt in trading activities. The reasons for suspending trading vary, but the most common reasons are systems maintenance, upgrades, computing errors, emergencies, ongoing Unusual Market Activities (UMA's), and blackout periods.
In the event of a trading suspension, securities may not be bought or sold. In addition, when a market is closed, it cannot have new orders executed. Existing open orders can be filled at their current prices when trading resumes, but they won't be canceled.
Broker's Limitations
When looking at a day trading broker, it's important to consider that the broker may not allow as many trades as you might otherwise expect. In addition, they could have restrictions from their side that need to be taken into account when performing your due diligence.
Here are some of those limitations:
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If a trader is active during the day and executes several day trades in a short period, it results in day trading commissions that exceed limits; the broker may charge an overage for these excess day trade commissions.
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Some day trading brokers charge for each day trade executed. This means that multiple day trades performed in a short period can exceed the day trading limits and lead to account overage fees.
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Trading brokers sometimes require their clients to have a minimum day of trading experience. These day traders must first prove themselves as part-time or full-time day traders before they are allowed to day trade frequently on an active basis.
Best Day Trading Platforms
8 best platform for day tradingBefore selection, it's important to look at certain aspects that directly affect your experience. It's essential to look for minimal fees and fast trading software.
Other things include:
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The number of securities that you can trade through a platform. Some platforms limit this, so it might be best to purchase a program with more flexibility.
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Ease-of-use and layout and technical aspects such as charts and graphs.
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Professional day traders who are looking for more advanced software should be sure that the platform they desire will support all of their necessary features. It also needs to have the power and capability to handle large, complex data issues.
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Multi-monitor setup support is necessary for increased efficiency and better trading tools.
Looking into platforms that support day trading activities, here are our ratings of the three top platforms available in the market.
Interactive Brokers (Stocks and Options) - 3/5
Binance (Cryptocurrencies) - 2.5/5
IG (Forex) - 4.5/5
Interactive Brokers - Best For Stocks
Interactive Brokers platform
It is the most popular among day traders because it offers very low commissions on the trades that you make. In addition, it is a very versatile platform, allowing you to trade all sorts of assets, including stocks and options. The only drawback with Interactive Brokers is that it doesn't offer a cryptocurrency trading platform.
Binance - Best For Cryptocurrency
Binance platform
This platform is handy for day traders interested in cryptocurrency trading because it offers many coins to choose from. The site also offers a spectacularly low fee of 0.1% on all trades.
IG - Best For Forex
IG markets platform
This platform is perfect for day traders who are more interested in the financial markets than cryptocurrencies. IG offers trading of Forex currency pairs, commodities, indices, and bonds. However, this platform doesn't offer crypto-coin trading.
FAQs
What Is Swing Trading?
Swing traders also buy and sell quickly but hold a position for a shorter period, usually three to five days on average.
What Is Scalping?
Scalping is a type of trading that day traders use to make quick profits by buying and selling stocks within minutes or even seconds. This advanced strategy seeks to capture the smallest price fluctuations in any given security, hoping to make a few pips profit on every trade.
What Is Intra-Day Trading?
Intra-day trading is similar to day trading because it focuses on taking advantage of short-term fluctuations in stock prices—in this case, over the course of hours. Traders engage in intra-day trading to capture the smallest of price moves.
What Does It Take To Be A Successful Day Trader?
You will need an advanced understanding of technical analysis, which measures the market's past, current, and future price movements. You'll also have to familiarize yourself with your chosen market—whether equities, foreign exchange, or futures—and monitor it closely throughout the day for opportunities.
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Team that worked on the article
Alamin Morshed is a contributor at Traders Union. He specializes in writing articles for businesses who want to improve their Google search rankings to compete with their competition.
Over the past four years, Alamin has been working independently and through online employment platforms such as Upwork and Fiverr, and also contributing to some reputable blogs. His goal is to balance informative content and provide an entertaining read to his readers.
His motto is: I can dream or I can do—I choose action.
Jeremy Flint is an MBA graduate and freelance finance writer primarily emphasizing content creation for wealth managers and investment funds. A former U.S. Army officer, he brings strategic vision to content development and tactical analysis to stock picking and economic assessments.
He’s been obsessed with the markets since he was a teenager and is passionate about spreading financial literacy by using his expertise to break down obscure market concepts for retail traders. His main focus areas are fixed-income investing, alternative investments, macroeconomic news, and the oil, gas, and utilities sectors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.