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→Rationale: There is an exception to the rule that firms may allow if the clients intention is not to day trade |
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Another argument made by opponents, is that the rule may, in some circumstances, increase a trader's risk. For example, a trader may use 3 day trades, and then enter a fourth position to hold overnight. If unexpected news causes the security to rapidly decrease in price, the trader is presented with two choices. One choice would be to continue to hold the stock overnight, and risk a large loss of capital. The other choice would be to close the position, protecting his capital, and (perhaps inappropriately) fall under the day-trading rule, as this would now be a 4th day trade within the period. Of course, if the trader is aware of this well-known rule, he should not open the 4th position unless he or she intends to hold it overnight. However, even trades made within the three trade limit (the 4th being the one that would send the trader over the Pattern Day Trader threshold) are arguably going to involve higher risk, as the trader has an incentive to hold longer than he or she might if they were afforded the freedom to exit a position and reenter at a later time. In this sense, a strong argument can be made that the rule (inadvertently) increases the trader's likelihood of incurring extra risk to make his trades "fit" within his or her allotted three-day trades per 5 days unless the investor has substantial capital.
The rule may also adversely affect position traders by preventing them from setting stops on the first day they enter positions. For example, a position trader may take four positions in four different stocks. To protect his capital, he may set stop orders on each position. Then if there is unexpected news that adversely affects the entire market, and all the stocks he has taken positions in rapidly decline in price, triggering the stop orders, the rule is triggered, as four day trades have occurred. Therefore, the trader must choose between not diversifying and entering no more than three new positions on any given day (limiting the diversification, which inherently increases their risk of losses) or choose to pass on setting stop orders to avoid the above scenario. Such a decision may also increase the risk to higher levels than it would be present if the four trade rule were not being imposed.
The rule however does allow for an exception. Position traders who have violated the rule (having less than $25,000 in a margin account and having made at least 4 round-trip trades in five consecutive trading days) may advise their broker of their true intention and the fact that their trading strategy is not a day trading strategy, and the firm can decide to allow the activity to continue. The rule represents a partial limit to speculation by means of day trading; in the moral context speculation is considered negatively. <ref>https://sites.google.com/site/thefinancialspeculation </ref><ref> https://www.jstor.org/stable/2376347?seq=12#page_scan_tab_contents </ref><ref> http://www.newadvent.org/cathen/14211a.htm </ref><ref>http://www.finra.org/investors/day-trading-margin-requirements-know-rules</ref>
==References==
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