The rules and regulations regarding trading can be hard to understand, and unfortunately, there are restrictions you might face if you make trades excessively. Stop losses are used by many traders, but does a stop-loss count as a day trade?
A stop-loss counts as a day trade only if the stop loss is executed in the same business day as your original trade. However, if your stop-loss is executed on a different day from the original trade, your stop loss will not count as a day trade. Four stop losses can flag you as a pattern day trader.
This article will explain what a stop loss is, how stop losses affect pattern day trading rules, and what happens when you are a pattern day trader. Additionally, I will also share some resources that you can utilize to learn more about being successful as a day trader and proper usage of stop losses in day trading. So let’s get started so you can be on your way to day trading as soon as possible!
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What is a Stop Loss?
An investor places a stop-loss order when they want to buy or sell a security at a certain price. When you place a stop loss, the order automatically executes when the price reaches the stop price or the price you set to buy or sell the security.
Investors use stop-loss orders to limit their losses when trading securities.
To prevent a loss from being too big, investors use stop-loss orders to set the lowest price they are willing to sell their security at or the highest price they are willing to purchase a security at.
For example, you can set a stop-loss order to sell a security at 20% below what you purchased the security for. If you purchased a share of stock for $200 and set a stop-loss order for 20%, your stock will sell if its price drops down to $160, making your loss only 20%.
You can use percentages or dollar amounts when ordering stop losses.
The one time that the market will not execute your trade at the specified price is if there is a sudden decrease in the security price that falls below your stop less price.
For example, say you have stock currently trading at $100, and you place a stop-loss order to sell it at $90. If the stock price suddenly drops to $60, essentially skipping your stop-loss price, the stop loss will sell your stock at $60.
For a quick, easy to understand video about stop losses, watch this one from Investor Trading Academy:
How Does Using a Stop Loss Affect Pattern Day Trading?
If you have a stop loss executed on the same day you bought the security, it will count as a day trade. But, if it does not occur on the same day, or the stop loss is executed after the trading day closes, it will not count as a day trade.
If the stop loss is executed after the trading day ends, it will be based on the next trading day’s price.
A pattern day trader executes four or more day trades or trades of securities bought and sold on the same day over five days. Pattern day trading is done with a margin account, which is an account where you can borrow money to invest against the investments you currently have in your account.
Long-term stop losses and daily stop losses affect pattern day trading differently. Daily stop losses have a higher chance of counting as a pattern day trade.
If you are day trading, and you place a daily stop loss on a stock that you just bought or sold, and the stop-loss order is executed that same day, it will count as a day trade.
On the other hand, if you have a long-term stop loss, it will not count as a day trade because the chances of it being executed on the same day as your initial trade are very slim. It will likely not happen on the same day because a long-term stop loss will have a bigger difference between the purchase price and the selling price than a daily stop loss.
This video on YouTube from TD Ameritrade explains more about pattern day trades:
What Happens if You are a Pattern Day Trader?
If you have four or more day trades in one week as a Pattern Day Trader, your account will be flagged as a Pattern Day Trader account or a PDT. If you are flagged as a PDT, you will have restrictions placed on your account to limit your trading abilities.
Accounts are flagged to keep investors from trading excessively.
However, you will still be able to trade, and as long as you do not continue to get flagged as a PDT, you and your trading account will be fine. But, once you are flagged as a PDT, you may get flagged more because of your previous trading patterns.
If you are flagged as a PDT, you must have more than $25,000 in your margin account to trade and borrow for investing.
Your account minimum can be a combination of cash and securities.
To profit from stop-loss day trading, you should take some extra time to learn what you can and cannot do before getting flagged.
Learn More About Day Trading
There are several books to help you learn about day trading and stop losses. Whether you are a beginner or have experience as a day trader, these are the best ones to teach you how to be a day trader. All of these are available on Amazon.com.
- How to Day Trade for a Living: A Beginner’s Guide to Trading Tools and Tactics: This book will help you get started as a day trader by teaching you the basics of how to trade, showing how disciplined you must be as a day trader, and exposing what trading strategies you can use.
- Day Trading QuickSmart Guide: The Simplified Beginner’s Guide to Winning Trading Plans, Conquering the Markets, and Becoming a Successful Day Trader: This book and complimentary online resources have the most up to date information about becoming a day trader, how to further your day trading skills, and what indicators you can use to choose and make trades.
- Day Trading Strategies: A Detailed Beginner’s Guide with Basic and Advanced Trading Strategies to Achieve Excellent Results: Beginner day traders can use this book to learn how day trading works, who should be a day trader, how to manage your risk and your trading accounts, and what mistakes many traders to make that cause them to lose money.
- The Complete Trading Course: Price Patterns, Strategies, Setups, and Execution Tactics: This final book will be your guide to trading, price trends, and the best tools that you can use to be a successful trader. The language is easy to understand but will still help you become a better trader.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
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Conclusion
Stop losses can be very beneficial to you as a trader, but you also must be careful with how you use them to avoid facing restrictions as a pattern day trader. As long as your stop loss does not execute on the same trading day as your initial transaction, the stop loss will not count as a day trade.
If you are flagged as a day trader, you will still be able to trade, but you will face some restrictions such as account minimums.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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