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What are the Basic Day Trading Rules?

P.M. Willers
P.M. Willers

There are some basic day trading rules that help to outline the processes, regulations, and best practices. A day trader is a stock trader who makes one or more trades per day and holds their positions or acquisitions for only a short time. There are limited markets that are open and accessible to day trading, and include currencies, options, stocks, and futures markets.

One of the most essential day trading rules is that these positions are rarely held after market close. Day traders use risk funds, or excess funds, that can afford to be lost. By utilizing risk funds, traders are protected both financially and emotionally.

Businessman with a briefcase
Businessman with a briefcase

There are several types of trades used in day trading. One such option is a short term trade, or scalping, that can last only a few minutes or even seconds. Another type of day trading is position trading or swing trading. If executing position trading, a position is held slightly longer, even throughout the day. Still, a position is not normally held overnight.

Depending on the trading system, one or both of these types may be allowed. Normally, day traders select one of the above types and only practice that type of trading. Alternatively, some day traders will select the type of trade by the conditions of the market during that time period.

There are several strategies that day traders implement in finding and making trades and include trend trades, counter-trend trades, and ranging trades. A trend trade is a trade that follows the current movement of the position, so if the price is moving up, a day trader might buy the position with the hope that the price will continue to go up. Conversely, a counter-trend trade is a trade that is purchased against or opposite the current price. In a counter-trend trade, a position would be sold if the price were increasing. Alternatively, a ranging trade is a trade that is used when the market is moving back and forth or has sideways movement.

Day traders use direct access brokers. Direct access brokers often have better access to exchanges and markets, and are usually able to access markets at a lower premium as well. Most day traders work for larger institutions. By working for larger financial institutions, they have access to larger funds and instantaneous buying and selling.

Restrictions can be placed on day trading by individual countries or economies. One such example is the regulation imposed by the United States Securities and Exchange Commission. The Securities and Exchange Commission (SEC) has regulated day trading by imposing a minimum amount on a trader's account. Since most day traders do not maintain an amount as high as the SEC requires, this imposition has been effective in preventing day trading within markets in the United States. The penalty for not following these day trading rules and regulations is normally a freeze on your account for up to 90 days.

Regulations and penalties implemented by other countries vary according to the country and market. Before starting to work as a day trader, it is essential to know the basic day trading rules for the markets you are interested in. Investigating the potential markets and regulations can help you become a smarter and more profitable day trader.

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