Understanding Etrade Day Trader Rules and Risks

As a day trader on Etrade, it's essential to understand the rules and risks involved. The Securities and Exchange Commission (SEC) requires that all day traders be able to demonstrate a pattern of four or more day trades within a five-trading-day period.

Day trading on Etrade involves significant risks, including the potential for substantial losses. The average day trader loses 70% to 90% of their account balance within the first year.

To mitigate these risks, it's crucial to have a solid understanding of the Etrade day trading rules. This includes knowing the margin requirements, which can be as high as 25% of the account balance.

E-Trade day trading is a trading strategy where you buy and sell the same security in a margin account on the same day to profit from small price movements. This strategy is not allowed in a cash account, where you must pay for securities in full before selling them.

Day trading in a margin account is defined by FINRA's margin rule, which applies to any security, including options. To qualify as a day trade, you must buy and sell the same security on the same day, or sell short and buy the same security on the same day.

A pattern day trader is someone who executes four or more day trades within five business days, and these trades represent more than 6 percent of their total trades in the margin account. This definition applies to trading in a margin account, not a cash account.

If you're classified as a pattern day trader, your account will be frozen for 90 days, and you'll need to maintain a minimum balance of $25,000 at all times. This freeze can be a significant hurdle for day traders, so it's essential to understand the rules and regulations surrounding pattern day trading.

Day trading in a margin account is not permitted if you're not a pattern day trader, and you'll need to follow the rules set by your brokerage firm to avoid being flagged as a pattern day trader.

To day trade with etrade, you need to maintain a minimum balance of $25,000 in your account. This is a requirement set by the SEC to ensure that you have sufficient funds to cover any potential losses.

You can use a combination of cash and eligible securities to meet this requirement, but the amount must be in your account prior to engaging in day-trading activities.

If your account falls below the $25,000 requirement, you won't be permitted to day trade until the account is restored to the minimum equity level.

To calculate your day-trading buying power, your brokerage firm will generally multiply your maintenance margin excess by four.

Here are the key requirements and restrictions for etrade day traders:

If you're classified as a pattern day trader, your account will be restricted from trading for 90 days if the minimum equity requirement is not met.

If you get a margin call, you'll have five business days to deposit funds to meet the call. If you fail to meet the call by the deadline, your account will be restricted to trading only on a cash available basis for 90 days or until the call is met.

The PDT flag can be a major inconvenience, prohibiting you from initiating new positions almost immediately when your balance falls below $25,000. You'll have to close out any existing positions to revive your account.

A pattern day trading reset, or PDT reset, can be a lifesaver, allowing you to remove the PDT flag from your account once every 180 days. This will give you a fresh start and enable you to place trades again.

If you get a margin call, you'll have five business days to deposit funds to meet the call.

A margin call can severely limit your trading ability, restricting you to a day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment.

Until the margin call is met, your account will be restricted to trading only on a cash available basis for 90 days or until the call is met.

Any funds used to meet the day-trading minimum equity requirement or to meet a day-trading margin call must remain in the account for two business days following the close of business on any day when the deposit is required.

The use of cross-guarantees to meet any day-trading margin requirements is prohibited, so you'll need to make a direct deposit to meet the call.

If you fail to meet the day-trading margin call by the deadline, your account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.

Being flagged as a pattern day trader (PDT) comes with certain consequences that you should be aware of. If you're classified as a PDT, you'll face restrictions on your trading activities.

You'll need to maintain a minimum equity of $25,000 in your margin account on any day that you day trade. If your account falls below this requirement, your broker may prohibit you from trading until the minimum balance is restored.

Your broker will continue to regard you as a PDT even if you don't day trade for a while, based on their reasonable belief that you'll engage in pattern day trading. This means that if you change your trading strategy to cease day trading activities, you should contact your firm to discuss the appropriate coding of your account.

If you're unable to meet a day-trading margin call, your account will be restricted to a day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment. You'll have five business days to deposit funds to meet the call, but if you fail to do so, your account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.

Here are the key consequences of being flagged as a PDT:

You can avoid being labeled a pattern day trader by topping up your balance to meet the minimum requirements. This will remove the PDT flag from your account.

Opening multiple brokerage accounts can also be a viable option. With multiple accounts, you can have an additional three trades for every five days.

However, be cautious not to spread your funds too thin across multiple accounts. This can lead to depleting your funds quickly, especially if you have accounts with balances below $25,000.

Using an offshore broker with no PDT restrictions is another way to avoid the pattern day trading rules. These brokers can offer more flexibility and allow you to trade on margin.

Keep in mind that trading with an offshore broker may come with higher commissions and less assurance compared to trading with a U.S. registered brokerage.

If you're not satisfied with Etrade's rules, there are alternative online brokerages available.

Etrade's minimum balance requirement for day traders is $2,000, but some brokerages have lower or no minimum balance requirements.

TD Ameritrade, for example, has a minimum balance requirement of $0 for its trading platforms.

Fidelity, another popular online brokerage, offers a range of trading platforms with varying minimum balance requirements, but some options have no minimum balance requirement at all.

You can avoid the Pattern Day Trading (PDT) rule by using multiple brokerage accounts. This option allows you to have an additional three trades for every five days.

By opening multiple accounts, you can trade more frequently, but be cautious not to spread your funds too thin. If you have funds below $25,000 in your account, your funds may get depleted quickly.

Keeping track of profits and losses in multiple trading accounts can be a challenge. Consider using a Google doc or Excel spreadsheet to help you stay organized.

Having multiple accounts can be beneficial, but it's essential to weigh the pros and cons before making a decision.

Options trading can be a viable alternative to avoid PDT restrictions.

James Schultz, an options trading expert, has spoken about the opportunities in trading options. He started trading options because the implied volatility was consistently higher than the realized volatility in the market.

To start trading options, day traders should begin with small, defined-risk strategies until they're comfortable with market movements and their options positions.

A virtual, "paper" money account can be useful for learning options mechanics, but it can't simulate the emotions experienced in real trading. So, even with small trades, start with real money as soon as possible.