Day trading can be a lucrative way to make money, but it can also be risky if you don’t know what you’re doing. One of the most common mistakes that new day traders make is free riding. Free riding occurs when a trader buys and sells a stock without having enough cash in their account to cover the purchase. This is illegal and can result in your account being frozen. In this article, we’ll discuss how to day trade without free riding.
Understand the Pattern Day Trader Rule
The Pattern Day Trader (PDT) rule is a regulation that requires day traders to have a minimum balance of $25,000 in their account. If you have less than $25,000 in your account, you will be classified as a PDT and will be subject to certain rules and restrictions. It’s important to understand this rule before you start day trading.
Use a Cash Account
To avoid free riding, it’s best to use a cash account instead of a margin account. With a cash account, you can only trade with the funds that you have in your account. This means that you won’t be able to buy and sell a stock without having the cash to cover the purchase.
Plan Your Trades
One of the best ways to avoid free riding is to plan your trades in advance. Before you make a trade, make sure that you have enough cash in your account to cover the purchase. You should also have a plan for when you will sell the stock and how much profit you expect to make.
Set Stop-Loss Orders
Stop-loss orders are a great way to limit your losses if a trade doesn’t go as planned. You can set a stop-loss order to automatically sell a stock if it drops below a certain price. This can help you avoid free riding because you won’t be able to buy and sell a stock without having the cash to cover the purchase.
Stick to Your Plan
It’s important to stick to your trading plan and not let your emotions get in the way. If a trade isn’t going as planned, it’s best to cut your losses and move on to the next trade. Don’t try to hold onto a stock in the hopes that it will bounce back.
Use a Trading Journal
Keeping a trading journal can help you stay organized and track your progress. You can use a trading journal to record your trades, including the stocks you bought and sold, the price you paid, and the profit or loss you made. This can help you identify patterns and make better trading decisions in the future.
Learn from Your Mistakes
No one is perfect, and everyone makes mistakes. It’s important to learn from your mistakes and not repeat them in the future. If you make a trade that results in a loss, take the time to analyze what went wrong and how you can avoid making the same mistake again.
Staying informed about the stock market and current events can help you make better trading decisions. You can use news sources and financial websites to stay up-to-date on market trends and company news. This can help you identify potential trading opportunities and avoid making trades based on emotion.
Day trading can be a rewarding way to make money, but it’s important to do it responsibly. Avoiding free riding is an important part of day trading, and it’s something that every trader should be aware of. By following these tips and staying informed, you can day trade without free riding and increase your chances of success.